License article

Wallet opening time as big investors take blow

THE corporate restructuring of Nine Network has put intense pressure on its two free-to-air competitors, Seven and Ten, in an environment where they all face structural and cyclical issues.

The No. 3 network, Ten, moved on Wednesday to shore up its balance sheet by wading into the equity market to raise $255 million, the second raising in six months.

This year alone it has raised the equivalent of its own market capitalisation. The pressure is now on the top-rating Seven Network - controlled by Kerry Stokes' Seven West Media - to follow the others.

While Seven remains the most profitable and highest rating of the television operators, providing it with a buffer against the soft advertising market, in the race for audience share the higher debt levels are a handicap.

The market is now punting on some kind of raising from Seven, whose rating performance is now being seriously challenged by Nine.

The decision by Ten to pass the hat around its shareholders to raise $225 million demonstrates only too clearly the financial predicament in which the company finds itself, thanks to a long-run slide in its share of the audience and a generally weak advertising market.


For the second time this year Ten's high-profile list of star shareholders, including Gina Rinehart, James Packer, Lachlan Murdoch and Bruce Gordon, will need to open their wallets to save the network from a knock at its door from its bankers.

The fresh injection of cash also comes on the eve of the payment of its licence fee, due this month.

The commercial success for any television network rests with its ability to produce programs that capture the eyeballs of viewers. The other critical success factor is doing it within well-managed cost bounds.

Tragically for Ten, its new billionaire masters either underestimated or have been unable to meet the first priority. In October Ten's market share fell to a perilously low 21 per cent.

Packer, Murdoch and Rinehart have lost about $360 million on their combined investments in little over a year and stand to lose more if the share price continues on its southerly trajectory.

Their plan to buy into Ten, seize control of operations, cut costs and rework programming has backfired. Instead the network has found itself in a nasty spiral of falling ratings and revenue and the need to cut costs so deeply that it will affect its ability to buy the programs needed for its revival.

Ten's television revenue slumped 14.5 per cent in the 2012 financial year, while its earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 46.5 per cent year-on-year.

The first job of its relatively new chief executive, James Warburton, was to raise fresh equity to avoid this situation.

But the $200 million the company raised in June was not enough and analysts argued it should have sought more in order to put a proper dent in the company's debt levels.

This time around the new shares will be sold for far less - which will represent a deep (and expensive) dilution for all investors.

At the expected issue price of 20¢ a share, the company could easily restart trading below this level.

But the fresh injection of funds, combined with proceeds from the sale of its outdoor advertising business Eye Corp, could result in the company being able to boast net debt of around $50 million.

This will provide some comfort, given there are now no large non-core businesses that can raise meaningful amounts of cash.

The new equity raising represents a major embarrassment for Warburton, who assured investors a few months ago that there would be no need to raise fresh cash.

While he cannot be blamed for all of the program-related decisions, his credibility will receive a blow as he will be perceived as having badly underestimated the gravity of the situation.

There are investors that take the view that the new board and management has not delivered on its promise to reduce costs and many have laid the blame at the feet of chairman Lachlan Murdoch.

A new program line-up launched at the start of this calendar year has been largely unsuccessful, with shows such as Being Lara Bingle and the Shire and Everybody Dance Now, which was hosted by Murdoch's wife Sarah, all rating poorly.

But it will be at least a year before the newest line-up gains traction, momentum and the runs on the board to entice media buyers.

Having said that, all three networks at various stages have experienced audience and advertiser slumps from which they have duly recovered.