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The moving parts behind the battle for Australia's audio companies
Welcome to a midweek update from Unmade. Today: We examine the motivations of the multiple players involved in the battle for Australia’s audio industry.
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The players and the plans behind the battle for Australia’s audio landscape
Tim Burrowes writes:
It was one of those surprise moves which in retrospect seemed obvious. Over the weekend, Seven West Media spent $50m on buying a 20% interest in ARN Media.
It had an immediate magic pudding effect. On a day when the ASX otherwise sank, the market marked up the value of ARN by an extra $28m, Southern Cross Austereo by $16m and SWM by $1m.
Surprising, because Seven got out of the radio business in 2019. Obvious because it would be hard to lose money on ARN’s relatively cheap stock, particularly as it pays a dividend, which Seven does not. And of course, it gives SWM a horse in the consolidation race which is now under way.
So it’s a good moment to examine the motivations, the people and the dynamics behind the key players circling the audio industry’s two key assets.
ARN Media - from newspapers, outdoor and radio to an audio specialist
ARN Media, led by CEO Ciaran Davis and chairman Hamish McLennan, kicked off the war in June when it bought a 14.7% stake in rival Southern Cross Austereo. Initially it was a secret war, but their real intentions became clear last month when it became a full blown takeover proposal.
The company has been through through three brands in the last six years. Until 2017, it was known as APN News & Media, before rebranding as HT&E (Here, There & Everywhere). In May this year, it rebranded again, as ARN Media, named for its main remaining asset - Australian Radio Network.
The company has its roots in newspapers, starting life as Provincial Newspapers, and then Australian Provincial Newspapers. It listed on the ASX as APN just over 30 years ago.
Along the way, the company span out its out of home advertising business APN Outdoor which ended up separately listed on the ASX via private equity firm Quadrant. During outdoor’s consolidation frenzy of 2018, APN Outdoor (then run by James Warburton) was sold to JCDecaux.
ARN (or APN, as it was then) also had a second outdoor company - Adshel. Initially a joint venture with US company Clear Channel, the company took full ownership in 2016 before selling it to Ooh Media during the outdoor consolidation.
ARN still owns the Cody outdoor advertising business in Hong Kong.
It also owns a 51% stake in the Simon Joyce-led creative agency Emotive.
But the main focus of ARN Media is audio, via its two networks Kiis and Gold.
Under Davis, ARN went through two transformative moments.
He masterminded the defection of Kyle Sandilands and Jackie Henderson away from Southern Cross Austereo to relaunch Mix as Kiis in 2014. Kiis overtook 2DayFM as top FM station in Sydney and ARN became the most profitable metro network.
And the second transformation came at the start of last year, when ARN completed its purchase of the Grant Broadcasters regional radio network, giving it national reach.
Southern Cross Austereo
The radio and TV assets of Southern Cross Austereo have changed hands in many a media deal over the decades.
The company’s radio roots began with Austereo, founded by Paul Thomson in 1980. Austereo’s first network included 2Day FM in Sydney, Fox in Melbourne and SAFM in Adelaide.
A merger via Village Roadshow in 1995 brought the Triple M network into the group.
The current version of SCA began in 2011 when Southern Cross Media took over Austereo, which brought in regional radio and TV licences into the mix.
The merger saw Austereo’s dynamic culture subsumed into the less fast moving one created by Southern Cross’s then boss Rhys Holleran, an accountant by background.
Holleran departed in 2015 to be replaced by TV adman Grant Blackley, who in turn moved on earlier this year.
Blackley’s greatest legacy may prove to be Listnr, the SCA audio streaming platform which could be the most underestimated asset in the complicated deal making currently underway.
Blackley’s successor John Kelly, the company’s long time chief operating officer, only had a matter of weeks in the top chair before the ARN takeover bid landed last month.
Anchorage Capital Partners
Anchorage has teamed up with ARN Media for the takeover bid.
To clear the regulatory hurdles - no company can control more than two radio licences in any one place - ARN needs a second partner.
The Australia-based private equity firm Anchorage has been around for a little over 15 years. ACP’s most notorious deal involved its buyout and float of Dick Smith Electronics, which collapsed a few years later.
The proposed deal would see ARN get the best bits of SCA including the Triple M network while ACP would take on SCA’s TV assets and ARN’s Gold network. (Mind you, it would’t be surprising if ARN engineered key Gold talent such as Melbourne’s Christian O’Connell and Sydney’s Amanda Keller and Brendan Jones to move across to Triple M as part of the process.)
The deal would also see the creation of a third organisation, unencumbered by the ownership rules related to broadcast licensing. ACP and ARN would jointly own a streaming company.
One day the FM transmitters will be turned off, and at that point the streaming company could hold a near monopoly.
Australian Community Media
Antony Catalano, proprietor of Australian Community Media is trying to belatedly gatecrash the deal.
He’s offering the SCA board the chance to bulk up by folding in most of ACM’s publishing assets in exchange for a 14.5% stake in the company. Potentially that might help the board fend off the ARN-ACP proposal.
Catalano’s vision would be to create a regional powerhouse based on SCA and ACM’s combined strengths. This would feed his vision for View Media Group, his push to create a third real estate player to rival REA Group and Domain, which he helped create in the first place.
Potentially View could push into other classified verticals beyond real estate - for example, automotive or jobs - particularly in the regions.
Perhaps the biggest challenge Catalano faces is to persuade the SCA board that their shareholders would contemplate buying what many would see as the old media assets of newspaper mastheads. The reason Catalano and business partner Alex Waislitz were able to pick up ACM cheaply in the first place was because when the merger of Nine and Fairfax Media took place five years ago, the local papers had to be sold on, as they would likely have been a drag on the company’s share price.
Catalano argues that he has transformed ACM into a capital-light, digital-first company, shutting all but one of its print operations and outsourcing the printing instead.
He now claims to have nearly 130,000 paying digital subscribers (a number that would need to be closely audited during any due diligence) delivering revenue of $20m a year.
One of Catalano’s key assumptions around improved profitability for the combined group would be based on efficiencies - in this case, the loss of about 200 jobs.
He believes a deal could lead to a 50% uplift in profits for the combined business.
I understand that SCA is yet to engage with Catalano on the details of his proposals which he made in writing to Kelly and chairman Rob Murray.
Seven West Media
Seven West Media, run by CEO James Warburton and chairman Kerry Stokes, entered the fray over the weekend, buying a 20% interest in ARN Media for about $50m.
It comes four years after Seven got out of radio, selling the Red Wave network to SCA.
Although Seven West Media has debt levels declared at $249m at the end of June, it has a debt facility of $525m, giving it room to be a player in any deal.
If the ARN-Anchorage deal does happen, it’s likely that Anchorage would try to move on its regional TV licences. Of particular interest for Seven would be Southern Cross Tasmania which carries both the Seven and Ten signals. Tasmania is an AFL-crazy state, about to get its own team; Seven holds the AFL broadcast rights.
News Corp Australia
The invisible hand of News Corp is rarely absent in the deal landscape.
News Corp Australia owns just under 15% of ARN Media, and NCA’s executive chairman Michael Miller knows the business well. During his brief exile from the company during Kim Williams’ reign, Miller ran what was then APN.
News Corp is mostly limited to the sidelines because Lachlan Murdoch (who will officially becomes proprietor at the company AGM this morning) already owns Nova Entertainment which includes the Smooth and Nova radio networks.
Potentially, Nova Entertainment could pick up some scraps, widening the Smooth FM footprint beyond Sydney and Melbourne.
Ten’s owner Paramount is also a potential player in any subsequent round of deal making.
In most of the country, SCA’s regional TV stations carry the Ten signal.
Previously Paramount declined to pay what SCA wanted to sell its TV licences. Affiliate fees have the attraction of providing relatively easy revenue, so there is an attraction in sticking with the status quo unless the price is a relative bargain.
If the ARN-Anchorage deal happens, a sale of the TV licences to Paramount would be logical.
So far, SCA has been keen to project a message of business as usual, with the board trying not to be rushed into any deal.
The next moment to create some momentum is the looming end of calendar year, which is also the financial half year for SCA. It would be a surprise if the next stage of the saga has not been reached by then
Declaration of interest: Through my self managed super fund, I own stock in ARN, News Corp, SCA and SWM.
Unmade Index posts positive action
Seja Al Zaidi writes:
Every stock on the Unmade Index that moved yesterday increased in share price, bringing the overall Index up 0.71% to 598.5 points.
Domain rose 1.13% and Nine 0.79%.
The audio players continued to rise - ARN Media lifted 1.08% in share price and Southern Cross Austereo 3.03%.
Time to leave you to your Wednesday.
We’ll be back tomorrow with an audio-led edition featuring Jonathan Pease in conversation with Cat McGinn about his new book, Winning the Room.
Have a great day.
Publisher - Unmade