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MELBOURNE, Australia — When Australian billionaire James Packer snapped up 18% of broadcaster Ten Network, the outlook for free-to-air television improved overnight — as did the prospects for up to $7 billion of media sales next year.
Packer’s share raid on Oct. 19 sparked talk that the private equity media assets bought at the peak of the boom by global private equity firms CVC Asia Pacific and Kohlberg Kravis Roberts could soon be headed back to the market.
Packer, a third-generation media mogul, has a reputation as an astute investor and his decision to buy a stake in Ten Network has sparked a re-assessment of the future of free-to-air television in Australia.
“Packer’s move on Channel Ten has certainly pushed up the valuations of Ten and its competitors. I suspect private equity are just waiting for a rally in the equity markets to justify a higher exit multiple,” said Citi analyst Justin Diddams.
The buyouts of the owners of Australia’s two other commercial networks, Seven and Nine, marked the peak of the buyout boom in 2006 and 2007 before the global financial crisis put a hold on leveraged dealmaking for three years.
But a turn in the advertising market, which has boosted revenues, and the renewed vote of confidence in free TV from Packer, one of Australia’s former media scions, means 2011 could see a $5 billion float of CVC-owned PBL Media and the sale of KKR’s 48% stake in Seven Media Group.
“In banking circles a lot of work is being done on sounding out the market,” said Constellation Capital analyst Brian Han.
Morgan Stanley said Seven Media could have an enterprise value of A$4 billion ($4.04 billion), based on an earnings multiple of 10 times. Third-ranked Ten Network is currently trading at a forward earnings multiple of 14 times, according to Thomson Reuters data.
“Free-to-air has had a mini-renaissance with Packer getting involved with Ten. I’m not sure I can see it happening in the next couple of months but I wouldn’t be surprised if it happened next year,” said one investment banker.
Packer sold half of PBL, which owns the Nine Network and the country’s largest magazine publisher ACP, to CVC for A$4.5 billion in 2006, and the remainder over the next two years to focus on his gaming and casino investments.
The Australian Financial Review has said CVC executives want to float PBL in March. It would be the biggest private-equity float since TPG sold out of retailer Myer in late 2009.
But a source close to CVC said there are no immediate plans to float. “James Packer is buying in (to Ten) because he thinks there is serious upside, so now is not the time to sell,” the person said, speaking on condition of anonymity.
Analysts’ diagrams of the incestuous nature of ownership of Australia’s TV sector already resemble a can of worms, and Packer’s move is being reviewed by the competition regulator.
Indeed, Packer plans to share half of his Ten stake with mate and fellow media player Lachlan Murdoch, son of Rupert Murdoch, who heads U.S. media conglomerate News Corp.
On Tuesday, both Packer and Lachlan Murdoch accepted board seats at Ten.
Lachlan Murdoch is also on the board of News Corp. and has investments in radio and regional TV through his private investment company Illyria.
Packer’s 49%-owned Consolidated Media Holdings and News Corp. also each own 25% of pay TV operator Foxtel.
Analysts said despite the denials, the market is turning toward a better time for floats.
One of the problems for potential investors in private-to-public floats is the lack of visibility on how the businesses have been run for three or four years.
Institutional investors are particularly skeptical about how much costs have been cut or capital expenditure delayed to improve current results.
“We’d have to see what sort of gearing levels, what multiples they want to put on things,” said John Grace, portfolio manager at Ausbil Dexia, which owns 4.7% of Ten.
Certainly Myer left a bad taste in the mouths of investors — in a tough year for retailers, it has never traded at its offer price of A$4.10 and is currently 6% below.
Both PBL Media and Seven carry heavy debt burdens that are due to be refinanced in late 2012 or early 2013, making next year an ideal time for their owners to restructure and sell.
How much CVC and KKR make on their investments will depend crucially on the size of the stakes they offer, gearing levels and a recovery in the weak IPO market.
While the sharp improvement in ad revenues this year is expected to slow, the outlook is nevertheless still buoyant. Upcoming regulatory rulings on sports rights are also expected to favor the free-to-air broadcasters over pay TV.
“The timing is pretty perfect for any re-floats,” says Constellation’s Han, who owns Ten shares.
“But I would not be buying into any IPO if it’s got a high gearing ratio at the top of the (ad) cycle. The risk is how much have the PE owners invested in the business, versus wringing them for cash,” he said.
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