Once a sedate company, WA Newspapers’ wild ride continues under entrepreneurial leadership.
KERRY Stokes is not one to let the grass grow under his feet.
In February last year, the Western Australian entrepreneur was selling the benefits of the new diversified investment vehicle created by marrying his private Westrac assets with those of listed media company Seven Network, which he controlled.
One day short of 12 months later, Mr Stokes plans to significantly unwind that diversified structure and sell – for more than $4 billion – most of the media assets held by Seven Group Holdings (renamed from Seven Network) into WA Newspapers Holdings, which he also chairs, to create a consolidated industry play.
The big announcements, this year and last, coincided with the release of critical half-year results.
In 2010, the Westrac news came on the same day that Seven Network showed a 40 per cent slide in revenue and a 47 per cent drop in interim profit after excluding significant items. This week’s announcement happened on the same day as both Seven Group Holdings and WAN reported their half-yearly results.
While Seven Group Holdings had clearly benefited from its brief marriage of media and earthmoving equipment, WAN’s results could only be described as lacklustre.
The publisher of The West Australian newspaper offered a 1.9 per cent increase in revenue for the six months ending December 31, compared to the previous corresponding period, and a 1.2 per cent rise in net profit.
Furthermore, the rapid structural changes at the then Seven Network and now proposed for Seven Group Holdings make it difficult for investors and observers to compare past periods of performance.
This week’s transaction is even more complicated than what the market has come to expect of transactions involving Mr Stokes, with an extraordinary shuffling of equity and debt between WAN, Seven and its private equity partner Kohlberg Kravis Roberts & Co.
Kerry Stokes, who will remain chairman of both listed entities, said Seven West Media would create the largest listed Australia-domiciled media company – placing him well for expected consolidation in the market as the online platforms muscle their way into the fight for audience.
“This combined company will be able to do things in Australia that we weren’t able to do before,” Mr Stokes said when the deal was presented to analysts and media in Sydney on Monday.
“This gives us the opportunities to take advantage of changing technology, both here and overseas.”
The bringing together of Seven Media Group’s assets – including the free-to-air Seven Network, Pacific Magazines and Yahoo!7 – and WAN was expected to result in $15 million in cost synergies. The merged company will be called Seven West.
The end result will make WAN even more clearly controlled by Mr Stokes via the investment company Seven Group Holdings.
Under the reverse takeover, dressed up as a $4 billion bid by WAN for the Seven Media Group assets, the Perth-based operations will be relegated to bit players in a much larger national operation.
Before this deal, Mr Stokes owned about 68 per cent of Seven Group Holdings, which in turn owned 45 per cent of Seven Media Group and 24 per cent of WAN.
If successful, his stake in Seven Group Holdings will remain the same while its stake in the new combined WAN-SMG group Seven West will be as much 34 per cent, depending on the conversion of preference shares.
This is the second massive period of change to WAN since Mr Stokes moved significantly on the register in 2007. The first was the ousting of the board led by Peter Mansell.
That was followed by an overhaul of management to bring in key Stokes’ appointees such as CEO Chris Wharton. After that there was an accelerated move to joint venture with Seven in areas such as online development.
Arguably, the Seven West merger will make the synergies and benefits of such joint venture activity more clear, especially to shareholders of WAN.
WAN director Doug Flynn, the appointed spokesman for the four independent board members, admits the deal offers very little in the way of direct synergies and is more about offering shareholders the opportunity to participate in broader changes in the media through a deal that would not have come about without the existing association between the companies.
Mr Flynn said he had only been on the board for two years but was well aware of the company’s track record, both in making poor investments such as Hoyts and, more often, for not making acquisitions.
He said many of the past mergers and acquisitions that WAN had considered before his time on the board would not have taken the company forward in terms of strategic position.
“This does,” Mr Flynn said.
“The performance of the digital multi-channels has been more successful that anyone could have thought. It has stopped subscription television in its tracks, at least temporarily.”
Mr Flynn was also positive about Seven Media Group’s content production, which he said was bigger than the combined output of its major commercial free-to-air rivals.
“Ownership of that intellectual property massively helps you as you move to a platform-agnostic world,” he said.
The former managing director of Rupert Murdoch’s News International Plc and ex-CEO of two UK companies – Aegis Group Plc and Rentokil Initial Plc – defended the ability of WAN’s independent directors to negotiate a good deal from Mr Stokes.
Mr Stokes’ predecessor as WAN chairman, Mr Mansell, had warned of the potential for the influential shareholder to bully the board.
“Do you think we’re bullied? Sam Walsh, Don Voelte, Graeme John and myself?” Mr Flynn said, noting the significant past and present executive experience of these players, who have all joined the board since Mr Stokes became chairman.
“I never felt bullied. We fought every inch of the way to get the best deal for shareholders. There was not a cigarette paper between us.
“We got pretty bored with hearing the expression ‘that is a deal breaker’.”
Mr Flynn said the idea was first mooted at board level in August but negotiations did not start until November.
He said the independent directors had chosen to use adviser O’Sullivan Partners because it was a boutique player with media experience and would not be conflicted by the fundraising elements of the deal.
Mr Flynn said O’Sullivan Partners had previously acted for KKR but that work had ceased some time ago and it no longer serviced the private equity market.
The independent WAN director welcomed the fact that KKR was staying on as an investor in the merged company, retaining almost 13 per cent as part of the complicated deal, which left it significant skin the game.
KKR will turn a modest profit on its 2006 purchase of 45 per cent of Seven Media Group, though the US private equity group’s return will be significantly assisted by the rise of the Australian dollar in that period.
“I have been puzzled why investors (here) don’t like private equity to stay in when they try to sell something,” Mr Flynn said.
“It is different from the US and Europe.”
He said the length of the negotiating period meant that the transaction had been costlier for WAN as performances diverged.
“Unfortunately, their performance got better,” Mr Flynn said.
“At the same time we had our share price drift down a bit which didn’t help our position.
“It is hard to lock up a point in time. The economics work for everyone nevertheless.”
He said WAN’s lacklustre performance for the half could be directly attributed to less advertising from the electronic goods retailers.
That market had become less aggressive in its advertising since the collapse of Clive Peeters, a major player in the WA market through the Rick Hart brand.
On the positive side, the WAN director was convinced the downturn was not directly linked to concerns at Christmas when big retailers cried foul over consumers using the internet to buy goods from overseas, GST-free.
“It doesn’t feel like a secular change to online, it is more about more macro issues,” Mr Flynn said.
He also played down talk of the newly merged business taking an aggressive acquisition stance any time soon, despite speculation that a poorly performing Fairfax Media could be a target.
Many observers see the proposed merger of Seven West Media as a better fit with Fairfax, than either of the existing entities doing it alone.
“Do I see the group being active? Yes I do,” Mr Flynn said.
“But we are not going on some acquisition spree.
“There is nothing on the horizon, (but) I don’t think it will stay that way forever.”
Initially, of course, that depends on the attitude of retail investors who will have a big say in the April 11 vote on the transaction. Once that is through, though, Mr Stokes is likely to have a bigger agenda that will be subject to market opportunities.
With Fairfax under new leadership and yet to clearly show the market that its digital strategy is working, Mr Stokes may well have the opportunity to close in quickly – before the green shoots grow anywhere, including under his feet.
