Win-Win For Southern Cross And Nine?

This story features NINE ENTERTAINMENT CO. HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: NEC

-Can SXL match or beat WIN share?
-SXL envisaged the main winner
-Also gaining from regulatory changes
 

By Eva Brocklehurst

The play in regional TV has moved to the next game, with a major deal being struck between Nine Entertainment ((NEC)) and Southern Cross Media ((SXL)). The pair announced a new affiliate agreement which will begin on July 1.

This means Southern Cross Media will broadcast Nine's metro content into regional Queensland and Victoria and into southern NSW. In return Southern Cross will pay a fee of 50% to Nine. Nine will help Southern Cross to expand its regional news services while in return, a national sales service will be provided for Nine across northern NSW and Darwin. Effectively, the deal replaces existing arrangements between Nine and WIN Group and Southern Cross and Ten Network ((TEN)) in those markets.

This covers the bulk of regional media but there are some outstanding areas, UBS observes. Nine still needs to negotiate an affiliate for Tasmania and Western Australia and will, presumably, deal with WIN Corp in these regions. For Southern Cross, as Nine already owns regional stations in Newcastle and northern NSW, an affiliate deal will need to be re-negotiated with Ten.

So, the broker's next question is: what will WIN do? WIN appears to be the loser in this game, as it needs to switch its affiliate feed from Nine to a weaker partner in Ten. For Southern Cross there is the potential to lift its existing 21% regional revenue share to the mid 30% range and a step up in the affiliate fee is only a partial offset, UBS notes.

The other question is whether Southern Cross can match or beat WIN's regional share. The broker suspects there may be some “stickiness” in regional viewing behaviour, although acknowledges Nine's ownership of key programs such as rugby and cricket may instigate a switch. UBS also believes upside exists if Southern Cross can beat WIN's mid 30% regional share, given WIN has arguably under-invested in local content.

Macquarie agrees the arrangement creates value for Southern Cross and Nine at the expense of WIN as there is the scope for further collaboration over time in terms of their national radio and TV platforms. This could include sales integration, content and cross promotion. In essence, such collaboration could unlock many of the benefits Macquarie has contemplated via a merger of the two.

The broker expects Southern Cross to reach an affiliate deal with Ten in northern NSW, albeit at a higher rate than it currently pays. Adding another player to the field, Macquarie notes Seven West Media's ((SWM)) regional network, Prime, could benefit in the near term from any advertiser uncertainty in the initial stages of the change over.

Ord Minnett estimates the switch in affiliation for Southern Cross will result in a revenue uplift of around $55m in FY17, because of the higher ratings and market share from Nine's content. Countering this, the broker estimates incremental expenses under the new deal will be around $50m in FY17 because of the higher affiliation fee in percentage terms, an increase in variable costs such as advertising agency commissions, and an increase in employee expenses given a larger sales force.

Still, Southern Cross is expected to be the main winner in this deal and the broker also expects this network will gain from potential regulatory changes over the next 12-18 months. Despite the benefits of the new deal, Ord Minnett retains a Sell rating for Nine, believing 2016 is the beginning of a structural decline in Free-To-Air TV advertising dollars, driven by audience declines.

FNArena's database has three Buy ratings, one Hold and two Sell for Nine Entertainment with a consensus target of $1.37, suggesting 17.8% upside to the last share price. The dividend yield on FY16 and FY17 forecasts is 10.5% and 11.8% respectively.

For Southern Cross there are five Hold ratings and one Sell. The consensus target is $1.09, suggesting 2.1% in downside to the last share price. The dividend yield on FY16 and FY17 forecasts is 6.0% and 6.1% respectively.

Ten Network has a consensus target of $1.30 on the database, suggesting 35.8% in upside to the last share price. There are one Buy and four Hold ratings. Seven West Media has three Buy, two Hold and one Sell rating. Its consensus target is 91c, suggesting 13.6% downside to the last share price. The dividend yield on FY16 and FY17 forecasts is 7.2% and 6.1% respectively.
 

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