Australia | Jul 23 2012
– Ten sells Eye outdoor business
– Brokers see price as reasonable
– Proceeds ease balance sheet constraints
– Weak TV ratings, valuation remain issues
By Chris Shaw
Ten Network ((TEN)) has announced the sale of Eye Corp, its outdoor business, to Outdoor Media Operations, which is controlled by Champ Private Equity, for $145 million. The proceeds consist of $120 million in cash up-front and a further $25 million payable in three years. Ten will retain some onerous contracts totalling around $16 million.
For JP Morgan the sale price is a reasonable outcome, as based on recent multiples within the outdoor sector and mid-cycle earnings for Eye Corp of around $16 million in EBITDA (earnings before interest, tax, depreciation and amortisation) terms the broker's implied valuation for the business is $120-$130 million. RBS Australia agrees the price achieved is reasonable.
The sale should be slightly earnings accretive for Ten, UBS estimating earnings per share (EPS) in FY13 should be boosted by around 0.8% if the sale is completed. More importantly, the deal allows Ten Network to alleviate some existing balance sheet pressures.
On UBS's numbers, the Eye sale should see Ten's net debt to EBITDA ratio falling to 1.8 times from 2.6 times previously. This compares favourably to others in the sector, UBS noting similar ratios stand at 1.9 times for Fairfax ((FXJ)), 2.8 times for Southern Cross Media ((SXL)) and 2.7 times for Seven West Media ((SWM)).
As RBS points out, the sale will relieve any lingering uncertainty on Ten's capital structure. The deal is also timely, as UBS notes Ten will need to refinance $210 million in corporate bonds by March of next year.
The other point of note for UBS is the transaction will improve Ten's ability to invest in TV content, which is needed to boost ratings. RBS agrees but remains cautious, noting there are few easily identifiable near-term catalysts given ongoing ad market weakness and ratings weakness for the network. This has Ten poorly positioned going into 2013 rate negotiations.
JP Morgan also picks up on this, suggesting any potential recovery in revenues is unlikely until at least the middle of next year. As a reflection of this and the sale, JP Morgan has cut its revenue growth forecasts.
This translates to adjustments to EPS expectations, consensus EPS estimates for Ten Network according to the FNArena database now standing at 1.7c for FY12 and 2.6c for FY13. Price targets have been adjusted accordingly, the consensus target according to the database now at $0.56, down from $0.585 previously. Aside from Credit Suisse, who has yet to adjust its model for the transaction, targets for Ten range from BA Merrill Lynch at $0.25 to Citi at $0.48.
Factoring in the sale, valuation remains an issue for Ten in the view of RBS. On its numbers Ten is more expensive than the likes of Seven West and Southern Cross on an enterprise value/EBITDA basis, meaning it is not the preferred way of gaining exposure to the TV sector in the broker's view.
RBS continues to rate Ten as a Sell. UBS is similarly negative, reflecting its view Ten is the most operationally leveraged stock in the Australian TV sector. As an example, UBS estimates a downgrade to its FY12 TV growth rate to 12% would deliver a 21% cut to FY12 EPS expectations.
The FNArena database shows total ratings for Ten of one Buy from Credit Suisse, three Hold ratings and four Sell recommendations. Citi is among the Neutral ratings, the broker taking the view any turnaround at Ten remains a longer-term proposition given tough market conditions. Macquarie agrees, suggesting any boost from a new programming strategy is likely to need a 1-3 year window to gain traction.
Shares in Ten today are down in a weaker overall market and as at 12.00pm the stock was 2c lower at $0.495. This compares to a trading range over the past year of $0.46 to $1.135.
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