How CBS Outmaneuvered Lachlan Murdoch to Buy Aussie TV Network Ten
In its first major international acquisition, the U.S. giant stunned the Fox mogul with a deal that gives the Leslie Moonves-led company a foothold in the fourth-largest English-speaking market.
"The industry is genuinely excited about having a $27 billion Big Brother looking after Channel Ten,” Mark Korda, the lead administrator of money-losing Network Ten, Australia’s third-ranked broadcast network, told local media Sept. 20.
He was unveiling that CBS, the U.S. home of reality competition show Big Brother, whose Aussie version used to air on Ten, had won a three-week battle with Ten shareholders Lachlan Murdoch and business partner and fellow billionaire Bruce Gordon for control of the network.
The showdown for Ten was worth the comparison to a reality TV competition.
CBS surprised, some even say shocked, Murdoch & Co., Australian media and industry folks alike by pulling off the reported $160 million (AUS $201 million) acquisition of Ten, the least-watched commercial network in what is the fourth-largest English-speaking TV market in the world, that had gone into receivership in June when it had a market capitalization of just $53 million (AUS $66 million).
It was a bruising result for Murdoch, executive co-chair of 21st Century Fox and News Corp, both financially and to his reputation as a top media executive. He had sunk $137 million of his own money into Ten in 2010, served in such roles as executive chairman, acting CEO and putative financial savior of the struggling network, and struck content and advertising sales deals with News Corp-managed pay TV outfit Foxtel.
"Tactically [the Murdochs] were clearly outplayed by CBS, and it seems they brought Ten to a crisis point too early,” Rodney Tiffen, a University of Sydney professor and author of a biography of Rupert Murdoch, told the Financial Times. “I guess they just didn’t see CBS coming. It was a case of monopoly arrogance by Murdoch and Gordon.”
In comparison, “CBS saw the opportunity to acquire Ten and they weren’t cocky," media analyst Steve Allen of Fusion Strategy tells THR. "They were certain in their bid and were able to say 'we’ve got a real interest in the outcome of this and can do better than Murdoch and Gordon. We trust management and how they will do things going forward, and we will back them'."
CBS Corp. chairman and CEO Leslie Moonves and CBS Studios International president and CEO Armando Nunez delivered a one-two knockout to punch to Rupert Murdoch's oldest son and his local partners. The Eye network first shocked Australian media Aug. 28 by announcing it had reached a deal with Ten’s receivers, trumping a rescue bid by Murdoch and Gordon.
The knockout for Murdoch came just three weeks later, when both bids were put to a vote by Ten’s creditors, which included CBS and Fox as program suppliers and Ten staff, amongst others. CBS won out thanks to the “overwhelming support” of 750 of Ten’s employees, according to Korda, who made it clear that they were not willing to continue Ten’s rocky ride under the stewardship of Murdoch.
Analysts say Murdoch and Gordon overplayed their hand. The Ten fiasco is a rare misstep by Lachlan Murdoch down under, with his private media investment firm Illyria having built Nova Radio into one of Australia’s largest and most profitable FM networks in recent years. Plus, he has influence at both News Corp Australia and Foxtel, the pay TV joint venture of News Corp and telecom giant Telstra.
What Murdoch and any pundits betting on him may have underestimated was CBS' several decades of experience in the Australian market and CBS' ability to strike smart deals at an opportune time.
"CBS has always looked at M&A in a fairly disciplined way," Pivotal Research Group analyst Brian Wieser tells THR. "They never want to overpay for anything and generally have stayed out of bidding wars. This is a situation where they know the asset well and were presumably in a position to take control of it for a favorable valuation."
And as a 33 percent partner in the joint venture for Ten's youth-oriented digital channel Eleven, "CBS would have known the minutiae of Ten’s business," Allen adds. "No one, with the exception of Lachlan Murdoch, would have had better access and knowledge about Ten’s business, [so] the result should really not have come as a surprise."
Ten’s most recent financial woes began in April this year when management reported a half-year loss before interest, taxes, depreciation and amortization (EBITDA) of $1.9 million on revenue of $270 million. At the time, CEO Paul Anderson warned that it was seeking to borrow more money "as a result of expected future trading performance and volatility within the free-to-air television advertising market."
Murdoch and Gordon, who controlled a stake of 22.6 percent at the time, this summer did not extend a $160 million bank guarantee they’d provided three years earlier and instead put the network into administration to set themselves up to be able to acquire it cheaply. They had expected that Australian media ownership laws would get repealed, as was indeed the case Sept. 16, allowing them for the first time to own a national TV network despite their radio and regional TV investments. Their bet didn't succeed.
“This fiasco was all about timing of financing, not poor operations or programming," says Allen. "We were, and still are, of the view that Ten would always come out the other side of this process and return to profitability — it was just that they needed some financing to keep trading. That Gordon and Murdoch withdrew that funding when they did was entirely opportunistic."
So what does CBS stand to gain now that it’s come out on top?
In addition to acquiring Ten, its digital channels Eleven and One and video-on-demand service Tenplay, CBS will launch its streaming service CBS All Access down under, competing with market leader Netflix and local services like Stan and Foxtel Now.
Ten has already aired such CBS shows as NCIS, The Good Wife and Scorpion.
Ironically, the Ten-CBS content deals, now dubbed “onerous” by Ten management as viewership of U.S. dramas has fallen out of favor with Australian TV audiences, allowed CBS to claim a stake as Ten's largest creditor, valuing those contracts at $712 million over the next five years. Owning Ten will allow CBS to have control over the TV company’s ratings and financial performance to allow it to make back more of that money.
Some wonder whether that will mean moving some U.S. shows from other Australian networks to Ten. After all, CBS has also been a longtime supplier to Ten’s commercial rivals, the Seven and Nine networks, with such series as Big Bang Theory and Criminal Minds.
Meanwhile, CBS’ Showtime is an exclusive supplier to local streaming service Stan, part-owned by the Nine Network, under a multiyear deal inked in January 2016 that will continue to be honored according to sources, who say “Showtime’s premium content lives well on Stan."
Wall Street observers have argued that CBS has its work cut out for it, but expressed trust in the management and content expertise of CBS' leadership. FBR & Co. analyst Barton Crockett recently called the Ten deal surprising and CBS' "first meaningful international acquisition." But he concluded that it was "modest in size but interesting."
Added Crockett: "CBS believes [earnings] can be improved to an attractive acquisition multiple by more efficient spending on programming. We give CBS the benefit of the doubt on this given its skill at programming in the U.S. and the fact that this is an English-speaking market where CBS already sells a lot of its content."
CBS would not comment for this article, but Moonves said when the deal was done: “We have been able to acquire [Ten] at a valuation that gives us confidence we will grow this asset by applying our programming expertise in a market with which we are already familiar.”
And CBS Studios International’s Nunez has said: “Network Ten and CBS have enjoyed a close working relationship for nearly two decades, and now CBS will continue to provide Network Ten with access to the very best in U.S. content. We also look forward to…enhance and expand on its great legacy of Australian news, drama, reality and sports programming."
Indeed, sports programming will be key to Moonves' and Nunez’s strategy for Ten.
The conglomerate’s first major test as owner will likely be when the rights for cricket tournament the Big Bash League come up for renewal in 2018. The BBL competition has been Ten’s biggest ratings success in the last three years, but rivals Seven and Nine are considering much bigger offers than the $75 million over five years that Ten paid in 2013.
CBS could make its Australian presence as Ten owner felt for the first time well before that though. Australia’s broadcasters are currently readying their annual upfront presentations to advertisers in October as they fight for their share of Australia’s $3.3 billion TV advertising market, in which Ten currently holds a share of around 25 percent.
However, improvements at Ten will take time, analysts say. CBS will look at Ten's current and possible new programming franchises with the understanding that its U.S. content gets "half the ratings of five years ago" and is "quite aware" it is now local programming that attracts viewers and dominates the Australian free-to-air market, Allen says.
Predicts the analyst: “It will take at least until the 2018/2019 season that Ten will be a more rigorous competitor to Seven and Nine."