25/02/2010 - 00:00

Uncertainty, debt details bedevil media-mining merger plan

25/02/2010 - 00:00

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THE devil is in the detail of Kerry Stokes’ shock plan to turn a conventional media business into a diversified media and mining services group.

Uncertainty, debt details bedevil media-mining merger plan

THE devil is in the detail of Kerry Stokes’ shock plan to turn a conventional media business into a diversified media and mining services group.

Seven and Mr Stokes’ private investment flagship, Australian Capital Equity, this week agreed an enterprise value for WesTrac of $2 billion, comprising $1 billion in equity and $1 billion in net debt.

To acquire WesTrac, Seven will issue 115 million shares worth $1 billion to ACE at an agreed price of $8.70 per share, in turn boosting ACE’s stake in Seven from 48 per cent to 68 per cent.

One detail of the deal gaining increasing attention is the transfer of $1 billion in debt from Mr Stoke’s privately held WesTrac to the publicly listed Seven vehicle, and WesTrac’s subsequent access to Seven’s $1 billion cash pile.

Despite its strong revenue and earnings base, WesTrac held only $46 million in cash at the end of December, raising questions about its ability to access cost-effective growth funding.

In comparison, Seven had debts of just $6 million and more than $1 billion in cash, $600 million of which has been earmarked for the immediate repayment of WesTrac debt. Seven would then have $500 million in cash and $500 million in net debt.

But designated Seven Group chief executive Peter Gammell, who also heads ACE, rejected suggestions that dealing with WesTrac’s debt was a key driver for Mr Stokes.

“That’s not an objective of this at all,” he said, noting WesTrac’s most mature debt facility was not due for three years and its remaining facilities matured in seven to 12 years.

“There’s no cash pressure to repay facilities.”

But Mr Gammell conceded Seven Group’s greater scale would make it easier to access affordable growth funding for both the media and WesTrac businesses.

“Probably the biggest synergy is access to capital markets, both debt and equity, at better rates,” he said.

“There’s no question both companies have aspirations for growth, though it’s difficult for me to pick which one is going to put its hand up first.”

Conceding there were no “straight synergies” between the media and WesTrac businesses, Mr Gammell said the group would look to “build synergistically around the two businesses that we have”.

While he would not go any further, many believe a fresh tilt at the James Packer-controlled Consolidated Media Holdings is one option that could be dusted off with access to WesTrac’s stronger cash flows.

But the uncertainty surrounding Seven’s growth plans has left analysts worried, especially given it opted for the WesTrac deal only after failing to find a better use for its cash within the media sphere.

“Seven Network holds a large amount of cash on its balance sheet and investor focus remains on how the company will invest this war-chest,” UBS said in a client note.

“We would flag that, given the ungeared balance sheet of the proposed merged entity, reinvestment risk would still exist.”

 

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