17/03/2008 - 10:14

West Australian Newspapers prepares for showdown

17/03/2008 - 10:14


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The directors of WA Newspapers Holdings Ltd have highlighted Seven Network Ltd's riskier investment profile, as they have sought to repel the rival media company's boardroom moves.

West Australian Newspapers prepares for showdown

The directors of WA Newspapers Holdings Ltd have highlighted Seven Network Ltd's riskier investment profile, as they have sought to repel the rival media company's boardroom moves.

Maintaining the line that the Seven boardroom bid is opportunistic, WAN's directors again spelled out their view that Seven was seeking control without a premium and was heavily conflicted.

WAN also offered further detail regarding its financial performance, including comparisons with its peer group across Australia, the US and Europe.

Perhaps the most intriguing part of the presentation was WAN's efforts to focus investor attention on how Seven has changed structurally since Mr Stokes took control.

In a 40-page document which more thoroughly outlined the WAN board's case for maintaining the status quo, Seven's rapid change from a largely pure media company to one with a host of unrelated and unknown assets was given special attention.

"What are you invested in? That is the point," Mr Mansell told WA Business News.

He said Mr Stokes route to control of Seven seemed to be being replicated at WAN, which suggested that developments at Seven under his control were also relevant.

Under the heading 'Shareholders should be aware that the risk profile of WAN could change if Mr Stokes and Seven Network gain effective control of WAN', the document claims Seven's recent earnings announcement revealed about $715 million in unidentified investments in listed entities.

That was on top of $730 million in large stakes in other listed companies which were known to the market and include a 19.4 per cent stake WAN. Others include GRD Ltd, Engin Ltd and Unwired Group Ltd.

The document claims this strategy was adopted since 2006, when Seven sold half its major media assets to US-based private equity firm Kohlberg Kravis Roberts & Co. It said the change has occurred without a shareholder vote under chairman Kerry Stokes, who now holds 40 per cent of Seven and wants to join the board of WAN.

"This fundamental restructure of the assets, investments and risk profile of Seven Network from a media
company to a listed investment company was completed (quite legitimately in terms of legal requirements)
without the approval of Seven Network's shareholders," the WAN board states in the document.

The claims are contained in the explanatory memorandum accompanying the a notice of general meeting and proxy form for a forthcoming shareholder vote on April 23 regarding four director positions following a requisition from Seven.

Seven is seeking the removal of chairman Peter Mansell and his fellow non-executive directors Jenny Seabrook, Erich Fraunschiel and Mel Ward, citing poor financial performance at WAN.

It is proposing the appointment of Mr Stokes and another of its directors, Peter Gammell, the WA-based head of Mr Stokes private empire.

A further nine people have nominated for a WAN board position - including online publisher Stephen Mayne, former WAN employee Mel Brewer, ex-newspaper editor Steve Harris, online entrepreneur Aidan Montague, professor Margaret Seares, publicist Keith Bales, businessman Peter Abery, retired advertising executive Kevin O'Keeffe and newsagent Sharon Armour.

In responding tp the Seven attacks, the WAN board said it had identified five key issues for shareholders including its belief that Mr Stokes may gain effective control of WAN without paying a control premium.

In a news and investor conference today, Mr Mansell revealed that the WAN board had not sought a takeover premium for the company, or even a sale at the current price, following its concerns that Seven was seeking to gain control without paying such a premium.

"We have not tried to extract a control premium from anyone," he said.

Speaking to WA Business News after the conference, Mr Mansell questioned what chance there was for such a takeover premium to be obtained with Seven sitting on a stake of nearly 20 per cent.

In addition, he claimed the investment climate seemed unlikely to champion a bidder who would have to pay the high multiple already applied to WAN shares, making the company somewhat a victim of its own success.
"It is difficult to find people who will buy us if they are not assured of getting us," Mr Mansell said.

Mr Mansell also underscored the non-executive directors' decision to quit en masse if shareholders put Mr Stokes and Mr Gammell on the board - a strategy flagged as possibility in WA Business News 10 days ago.
"We agonised over it, believe me," he said.

But Mr Mansell that ultimately, if the shareholders were not convinced by the board's view it was best for them to clear the decks rather than remain as obstacles.

It would, he said, be impossible to work with Mr Stokes or Mr Gammell given the board's belief that the Seven representatives had a conflict of interest.

He called on Mr Stokes to reveal which of the nine other candidates for the WAN board he supported.

Mr Mansell also reiterated the board's view that Seven had moved to highlight financial performance at a time when abnormal write-downs had briefly impacted profitablity and that WAN would to restore dividends this period.

WAN CEO Ken Steinke was also present at the conference to take questions on performance and strategy.

Mr Steinke denied his presence reflected a decision to take sides in the boardroom battle and, as an unelected director, he simply doing the job expected of him.


Today's statement from WAN is pasted below, as is a statement from Seven issued yesterday:

West Australian Newspapers Holdings Limited today confirmed the dispatch to shareholders of a Notice of Meeting and Explanatory Memorandum relating to the meeting requisitioned by Seven (WAN) Pty Limited (a Seven Network company) to remove all non-executive directors of WAN.

The meeting will be held at the Hyatt Regency Hotel, Perth at 2.30 pm Perth time on Wednesday April 23 2008.
The meeting was requisitioned by WAN major shareholder, Seven Network, which is seeking to have Mr Kerry Stokes and Mr Peter Gammell elected to a five member board. Seven has proposed resolutions to remove the current Chairman and the other three non-executive directors, in order to make way for themselves and two other candidates.

WAN's sole objective in preparing the meeting documentation was to ensure that shareholders were fully and fairly informed about all matters relevant to their decision on how to vote at the meeting.

The WAN board has identified five key issues which they believe shareholders will need to consider carefully when deciding how to vote at the meeting. Those issues are:

1. There is a significant risk that Mr Stokes and Seven Network may gain effective control of WAN without paying a control premium.

2. Seven Network is a direct competitor of WAN, creating potential for recurring and systemic conflicts of interest.

3. The criticism of the board and the company made by Seven Network and Mr Stokes ignores WAN's strong underlying performance.

4. The focus by Seven Network and Mr Stokes on recent results ignores the fact that WAN's recent dividend payment was affected by abnormal events and that the final dividend for the 07/08 year is expected to be significantly higher than the interim dividend.

5. The company has a clear strategy in place to generate significant valuefor all WAN shareholders.

The Explanatory Memorandum (EM) that has today been sent to shareholders contains detailed information on each of these issues.

In considering how to vote, WAN shareholders should carefully consider whether the potential benefits which Mr Stokes and Seven say they can provide to WAN are outweighed by the issues that have been highlighted.

On the issue of control, the Chairman of WAN, Mr Peter Mansell said:"Mr Stokes gained control of Seven Network without making a takeover offer. The early stages of that process bear strong similarities to what Mr Stokes is attempting to do now in relation to WAN."

"A typical takeover premium of 30 per cent, if applied to WAN's current market value, would be worth between $3.00 to $3.50 for WAN shareholders."
"If Seven were to gain control of WAN without paying a premium, there
would be a significant loss of value for WAN shareholders."
The risk of conflicts of interest has also been identified as an important issue for shareholders to consider. Seven competes directly with WAN in a number of areas and the WAN board has identified the potential risk for recurring and systemic conflicts of interest.

Seven has criticised WAN's board and the company's recent financial and operating performance.
The EM responds in detail to these criticisms.
Among other things, the EM highlights WAN's superior performance when measured by:
- total shareholder returns versus the ASX 200 (Industrials) and Seven Network,
- annual revenue growth and EBITDA margin versus other newspaper publishers, and
- current and normalised dividend yield.

Mr Mansell said: "The issues of control, conflicts of interest and strategic direction go to the core of shareholder value and that is what is at stake here. Any suggestion that WAN's business is performing poorly is misleading and
designed to obscure the key issue of control"
"WAN continues to experience significant revenue and EBITDA growth and the business continues to perform strongly. Importantly, the recent reduction in the first-half dividend was an abnormal event driven in part by a significant investment in upgrading the printing presses to reposition the Company for future growth.


Below is a statement from Seven:

Seven (WAN) Pty Limited is the largest shareholder in West Australian Newspapers Holdings Limited (WAN), with almost 20 per cent. We write to you to express why we believe you, as a fellow shareholder, should vote "FOR" resolution 1 to remove the Chairman of WAN, Mr. Peter Mansell.

WA's booming economy is the envy of the rest of Australia. Yet, in the midst of this prosperity, WAN's core business of selling newspapers and attracting readers is going backwards.

WAN's profits may have grown over the years and its margins may be high, but consider these important questions:

Why has circulation been in steady decline while the population has been growing at over 40,000 per annum?
Why has Saturday's edition, by far the most profitable, lost approximately 80,000 readers and more than 25,000 in circulation in the past two years and is now dangerously close to being overtaken by The Sunday Times? Why are fewer Western Australians buying The West Australian?
Why are agents giving up their WAN delivery runs? What impact does persistent distribution problems have on circulation?
Why is The Australian growing and thriving in WA at the expense of The West Australian?

And it's not just the printed newspaper that is suffering:

Why do so many Western Australians get their online news from the Sydney Morning Herald's website instead of from thewest.com.au ?
Why does The Sunday Times website, perthnow.com.au, have twice as many unique visitors as thewest.com.au ?

The answer to these questions is that the company has cut costs to a point where it is undermining the fundamental performance of the business and impacting future profitability. It's been under investing in the very activities that are needed to grow the business in a digital age.

WAN's share price tells you what's been happening. It has dropped from over $16 to less than $11 in less than six months, worse than other comparable listed newspaper companies. If this isn't bad enough, we have all recently suffered a 30% drop in dividends.

Do you want more of the same with the current Board or do you wish to embrace a real opportunity for change?

Without change, all we can expect is more of the same - a continued pursuit of cost-cutting and under-investment in the franchise. We believe this is a crucial error, one for which the Board and the Chairman must take responsibility.

Seven has taken this action because we believe the company, led by the Board, has gone past the point where it can continue to grow profits through further cost reductions.

We have lost faith in this Board's ability to rectify WAN's problems and deal with the challenges of the future. We therefore have no alternative but to seek a change of leadership and accordingly we have put forward this resolution.

This is not about the Chairman, or the other Directors, as individuals. They are a well qualified group of business people with professional backgrounds.

But, WAN needs Directors with extensive media experience so that the Board can recognise the problems and meet the challenges of the future.

The experience of Kerry Stokes and Peter Gammell in owning and managing newspapers and other media would be of great assistance to WAN.

Instead of criticising from the sidelines, we approached the Board with an offer of help. Our requests to join their Board were rebuffed, for reasons we simply don't accept.

The Board claims that we are competitors and that we are seeking to control the company. We completely refute these claims:

...obviously you do not advertise on Seven to sell your house or find employees.

...obviously you do not control the company with only two members of the Board.

This is not about competition or control...... but it is about performance.

We want a strong, independent, Western Australian based media business and a newspaper that reflects the aspirations of its shareholders and the community. We want the company to grow and reward existing shareholders with a rising stream of dividends. Together we can restore The West to its rightful place.



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