Industry orphan Ten Network is in a downward spiral

If the current crop of Ten Network tyre kickers don’t bother to ask its chief executive, Hamish McLennan, for a peek at the log book and rego papers, the future of the third commercial network could become quite interesting.
Shanghai night field

The company’s directors have retained law firm Gilbert & Tobin to advise on solvency – and while this is not to suggest the company is even close to being placed into administration, it does underline the real need for it to produce a profit. Last year three of its largest shareholders, Lachlan Murdoch, James Packer and Bruce Gordon, guaranteed Ten’s $200 million debt to Commonwealth Bank.

Given these owners are now ultimately responsible for the debt, the future of the company rests with them. Together with Gina Rinehart, Packer and Murdoch are down about 80 per cent of the value of their Ten stake.

The company has put itself on the blocks as at least three of these billionaire shareholders seem to have lost interest. Ten is increasingly looking like the orphan of the industry.

Lachlan Murdoch – who has been the main driver of Ten – has recently been anointed by his father Rupert to run the family’s giant media empire thus has more important matters to attend to.

James Packer, in my view, only took an interest in Ten to further his main agenda of enhancing the value of his then-pay television investments in Foxtel and Fox Sports. He has since sold these for a healthy price and no longer has any need to influence Ten’s programs. He quit the board a couple of years ago.

Gina Rinehart’s motivation for entering the media market appears to have had everything to do with directing editorial to suit her various interests which at the time she acquired the stake in Ten was dominated by defeating the super tax on mining.

Just what Bruce Gordon is trying to achieve has long been anyone’s guess – so let’s assume it was simply to get a seat at the table to protect his larger regional television investment in WIN.

For years now investors that have bought into Ten were taking a classic punt – what appeared to be a cheap option over what could be a big recovery story.

The trouble is over the past few years the option has become cheaper and the recovery more elusive.

After yet another performance downgrade last week it is becoming increasingly clear Ten has structural problems that MasterChef, Offspring and Big Bash cricket alone can’t fix.

Ten is in a downward spiral from which it is getting harder to recover. As earnings and cash flows fall, the investment needed to buy ratings-winning programs is even more difficult to come by.

The current season of MasterChef and Offspring worked well enough – as they did last year – but it needs some more hits to follow when the current seasons are over.

There is a lag in the official share of advertising figures but the most recent data for May from Standard Media Index shows Seven Network at a healthy 41.6 per cent but being more closely nudged by Nine with 40.6 per cent. Ten dropped to a disappointing 18 per cent.

But worse still, the television industry advertising spend dropped 1.3 per cent for the month. Thus Ten scored a smaller share of a smaller market.

This is not a great environment in which to be parading itself to potential suitors.

While Nine has previously demonstrated that being outside the glare of public listing provided fertile ground for restructure, its issues had more to do with its balance sheet than its operations.

Even at the current low share price of around 27¢ Ten does not represent a bargain unless would-be bidders are happy to pump in sufficient funds to invest in programming, which will require patience. It is still capitalised at about $700 million and has $200 million in debt. But analysts are not expecting to see black ink for a while. Citi’s Justin Diddams projects a full-year 2014 loss before interest, tax, depreciation and amortisation of $66 million and a smaller loss in 2015.

Having said this, McLennan has managed to work well on costs, including renegotiating programming agreements from US suppliers, thus placing the company in a good position to capitalise on any meaningful recovery in revenue.

But he noted last week the benefit of the most recent cost reduction won’t flow through to Ten’s earnings until 2015. He has also sensibly reset Ten’s target audience towards a slightly older demographic. But the challenges remain.

The various parties that have been speculated as sniffing around Ten are said to be at very early stages and who knows whether they will take a bite.

For Packer, Murdoch and Gordon a more sensible outcome could be to see if, as Ten’s debt owners, the company’s assets ultimately fall to them.