Australia | Mar 29 2007
By Greg Peel
Here is the news. There is none.
While analysts were able only to acknowledge a lack of new information regarding progress in CanWest’s attempts to sell its 56.4% stake in the Ten Network (TEN), the simple truth would appear to be no news is not good news.
Management has been furiously waxing and polishing and applying the tyre black to this pre-loved veteran, but no amount of upbeat guidance is going to prevent any would be buyers from opening the bonnet. Ten’s second quarter profit fell 32%, and analysts can find little to be cheery about.
Television revenue and market share did indeed rise in the second quarter, but only from a previous quarter that was very poor. The fact that this was the first rise in six quarters might seem encouraging, but this was still achieved in an overall declining FTA TV market. And then there were the costs.
Analysts could only shrug their shoulders in noting that the turnaround in television they had been expecting was all but undermined by a subsequent increase in costs, particularly in new programming. If Ten has to pay more for content to broadcast in a medium on its death bed, where is management’s expected earnings growth for the full year going to come from? And this is before the AFL expense starts to bite, and the Fox deal, and the Rugby World Cup is approaching for a Wallaby side that could well struggle to make the semi-finals.
Even Ten’s offshore expansion in outdoor advertising disappointed, with start-up costs also exceeding analyst expectations.
Clearly suitors are not forming a queue at the door.
The importance of the quarterly result, which saw many an analyst slash ongoing earnings forecast, is overshadowed by a sales process for which the desired outcome is a 100% sale. Media was hot in 2006, but so far Ten has been a wallflower. On notification of the relaxing of media laws private equity wasted little time in snapping up deals in Nine (PBL) and Seven (SEV). Southern Cross (SBC), APN (APN) and Rural Press (RUP) have all been snaffled. The current Ten share price reflects a market perception that Ten should also fall naturally on to a shopping list.
At current levels, Ten’s multiples are too high. Deutsche Bank analysts spoke for most in finding it hard to see how Ten would fetch more on a multiple basis than PBL and Seven. Deutsche values Ten at $2.90 on the assumption there is someone out there looking to buy. This, the analysts note, implies a 12.2x FY08 EBITDA multiple which is about 16% above the PBL and Seven deals and 7% above APN. With the share price closing at $3.16 yesterday, Deutsche retains a Sell rating.
Credit Suisse today joins Deutsche and UBS with Sell ratings, having downgraded from Hold. All other brokers in the FNArena database retain Hold, basically because the stock is in play. Only Macquarie analysts were able to sound slightly positive on Ten’s outlook, but suggest any premium on sale will be disappointing – probably less than 15%.
In arriving at a similar valuation multiple to Deutsche, Credit Suisse dropped its price target from $3.40 to $3.00, thus triggering the downgrade. The average target in the database now sits at $3.08.
What will be the attraction? Macquarie suggests:
“Ten is already well run and new management would recognise that opportunities for significant improvement are few.”
Merrill Lynch analysts then neatly summed up the general mood amongst colleagues around town as such:
“This valuation setting, combined with mixed fundamentals, highlights why CanWest may find it difficult to attract willing buyers.”