Turnbull And Anticpated Media Reforms

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

-Need for industry consensus
-NEC probably most advantaged
-TV licence fee reduction most likely
 

By Eva Brocklehurst

Will changes to Australian media be more likely now former communications minister, Malcolm Turnbull, is Prime Minister? This is the question brokers are asking, as Mr Turnbull has pursued a reform agenda.

Reforms were put on the back burner because of a lack of consensus among media companies but it remains widely known that Mr Turnbull is keen to address regulation in the sector, which many argue has become out of date with the advent of the internet.

The two main themes, in Citi's view, are TV regulations and the cross media ownership laws. TV licensing has a "reach" rule regulating the extent of licence coverage. There are also issues regarding local content requirements and the anti-siphoning list – which protects sport on free-to-air TV (FTA). Cross media rules prevent mergers between traditional media assets of TV, radio and newspapers.

Citi suspects that TV reforms could benefit Nine Entertainment ((NEC)) and Southern Cross Media ((SXL)) should they pursue a merger if the reach rule is removed. However, as consensus remains a requirement among broadcasters, Citi considers a change unlikely.

Removing cross media ownership rules is also unlikely any time soon, in Citi's view. In any case, cross media mergers evolve out of necessity because of structural challenges and, therefore, share price upside is limited.

The probability of reform increases with the new PM but this does not make it highly likely, JP Morgan contends. The most probable area is TV licences, given the support in the past from industry CEOs for a reduction in the 4.5% FTA fee and, secondly, a scrapping of the 75% reach rule.

This would trigger regional and metro TV consolidation. This broker, too, envisages Nine Entertainment the most likely to acquire another station, given its strong balance sheet. Southern Cross is the most likely target. Modelling a 1.0% reduction in the FTA licence fee provides a potential upgrade to FY17 earnings for Nine Entertainment of 6.0%, for Seven West Media ((SWM)) of 4.0% and for Ten Network ((TEN)) of 13.6%.

While agreeing the reach rule is redundant, given the advent of the internet and converging media, JP Morgan believes its removal presents more of a challenge. This requires consensus among both politicians and the industry. The prospect of an election in the next 12 months also suggests the timing of any change might be further into the future.

The case is about "when" not "if", Credit Suisse asserts. The broker believes Malcolm Turnbull would be willing to push ahead with reform without media proprietor consensus. There is also likely to be bipartisan support for removing the reach rule and reducing TV licence fees. Moreover, the broker envisages no issue with putting a package forward ahead of the election.

Again, Nine Entertainment is considered the best positioned, able to merge with Southern Cross or WIN Corp depending on the risk/reward. There remains a possibility of a tie up between Southern Cross and Ten Network, but Credit Suisse believes this option offers less upside to the Southern Cross shareholders. If other deals go ahead the broker expects Seven West would consider acquiring Prime Media ((PRT)) so that it is not at a reach disadvantage.

The broker is even more confident in a reduction in the TV licence fee and notes every 1.0% reduction in this fee adds $30m to the sector's earnings. Removal of the cross media ownership rule, or 2-out-of-3 rule, would provide additional opportunities but, as this only currently restricts transactions involving radio assets, Credit Suisse does not believe it is a game changer.

If removed, it would allow Fairfax Media ((FXJ)) to merge with Nine Entertainment, for example, without having to divest its 54% stake in Macquarie Radio. In a similar way, Seven West could acquire a radio asset without having to divest any assets in Western Australia.
 

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