How Foxtel can Save Ten from Complete Oblivion

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Ten Network [ASX:TEN] has confirmed the worst to investors today. To be fair, the dismal half year results came in line with investor expectations. Markets had pencilled in losses of $317 million. Instead Ten announced it lost $264 million in the first six months prior to February. Better than expected, but it only adds to the broadcaster’s crippling debts.

Most of the losses were driven by a writedown of $251 million in the value of its television license. Needless to say, Ten CEO Lachlan McLennan told investors not to expect a dividend payout this year.

Shares have slid progressively since 2010 and are trading at $o.20 per share (April 30). That’s still far below the $1.33 per share it was trading at five years ago. And it’s down almost 9% this year alone.

Citigroup’s [NYSE:C] outlook for the broadcaster is more or less consistent with Ten’s current share price. They believe Ten shares are in line with the outlook and risks involved with buying them. They warn investors that Ten remains a high risk gamble — Ten’s investors have known this since 2010.

The company also announced to shareholders it’s nearing the limit of the $200 million guaranteed loan it received in October 2013. That makes Australia’s third biggest commercial broadcaster a downright mess. Classifying it ‘under extreme financial strain’ wouldn’t do it justice.

Improved ratings have failed to lift its flagging fortunes. Even an uptick in key demographics hasn’t translated into a growing share of advertising revenue.

What Foxtel wants from a stake in Ten

The saving grace for Ten could be pay TV giant Foxtel. It’s believed they’re close to securing a 14.5% stake in Ten. That would inject $85 million into the broadcaster. Foxtel might also want to raise another $100 million through a general offer to existing shareholders at $0.18 a share.

Mr McLennan’s plans for Ten have gone beyond growing the business. He clearly sees Ten as a vehicle for bigger players. That explains why he’s calling for the government to tear down media ownership regulations.

Existing laws place strict rules for media ownership. That means that Foxtel can’t take more than a 15% share in Ten. Communications minister Malcolm Turnbull has talked about scrapping the ‘two out of three rule’. Doing this would allow media companies to own newspapers, television and radio stations all in the same market.

But if Mr McLennan is relying on this to save his company, that means he sees Ten’s future in the arms of someone else. Newscorp [NASDAQ:FOXA] chairman Lachlan Murdoch already holds a joint 17.88% stake in Ten with James Packer. And Newscorp owns half of Foxtel. Ten would fall under the wing of a pay TV monopoly, which can’t hurt its future.

But Ten would need shareholder approval if it issued shares equivalent to more than 15% of its value. That might prove easier said than done. Foxtel knows it won’t be easy to convince Ten’s shareholders. That’s because foreign capital investment firms have tried on two previous occasions to do something similar in the last three years. And they’ve failed on both accounts.

If shareholders accept, Foxtel would want other investors to inject cash too. It thinks it’ll take a lot to turn around the commercial broadcaster. That’s why it would seek to make a general offer to shareholders.

Why a Ten deal makes sense for Foxtel

For one, Foxtel can use Ten for its free to air exposure. Ten is the only commercial network to increase its 25–54 audience this year (up 25%). Foxtel has increasing competition from Netflix and other services to contend with. That’s why it took a 50% stake in Presto, a TV and movie streaming service. But Netflix poses the biggest threat to Foxtel’s business plan. Foxtel doesn’t want to lose market share in the important 25–54 demo. But its streaming service, Foxtel Play, is still $40 more expensive than Netflix per month.

Foxtel could also strike a deal on television advertising sales. And that could extend to programming deals. That could turn Ten into a vehicle to sell Foxtel’s lineup. And it could bring high profile sport back to Ten. The strategy for now is unclear, but the opportunities are there to exploit.

And if an agreement was reached with Ten, the combined force of the two companies would give Foxtel’s sales division MCN more than $1 billion in television advertising. MCN is responsible for the advertising interests of 68 television brands in Australia. That would improve Ten’s advertising opportunities in the free to air space.

It may not change the outlook for investors in the short term. But a Foxtel stake in Ten would improve the position of both companies in the increasingly competitive small screen market.

If you’ve invested in Ten in the past five years, you’ve lost money. Even at its current value of $0.20 a share, Ten’s stock has been a disaster for investors. But believe it or not there are worse stocks you could be in. To find out which, check out The Daily Reckoning’s Vern Gowdie’s free report ‘Sell These Five Fatal Stocks Now’. In it, he shows you the five companies posing the biggest threat to your portfolio right now. And you’ll never guess who the five household companies are. To find out how to download his report, click here.

Mat Spasic,

Contributor, The Daily Reckoning

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The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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