‘I don’t think it’s been fully appreciated by the market’: SCA CEO says network is undervalued in ARN takeover bid

ARN seems pretty confident its takeover of rival Southern Cross Austereo is likely to close this month, but as SCA boss John Kelly tells Mumbrella, the offer simply may not stack up.

A few weeks before Kelly took over as managing director and CEO of SCA last July, the company’s nearest competitor, ARN Media, took a 14.8% stake in the business he was tasked with steering through a period of advertising downturn and general market tumult.

UPDATE: SCA shareholders look to remove board and management

On October 18, ARN formed a consortium with Anchorage Capital Partners and lobbed a takeover bid, in which the two company’s assets would be jumbled and restructured, with shareholders of both companies holding stock in a new venture called ARN Newco.

The deal was a certainty to close before Christmas, ARN promised, but the new year started with radio silence.

Last week was the first real update of the year, as ARN chairman Hamish McLennan told shareholders in the company’s half-year financials: “We are strongly focused on delivering shareholder value, and we are confident that the Indicative Proposal to acquire SCA represents a compelling proposition for both ARN Media and Southern Cross Media shareholders.

ARN’s CEO Ciaran Davis told Mumbrella later that same day: “We believe it’s eminently executable. And we’d like to move towards that timeline of completion by the end of March.”

According to comments made by SCA’s John Kelly yesterday — both in an investment call regarding the company’s half-year financials, and later to Mumbrella — such a timeline seems fanciful.

During the earnings call, Kelly explained that “implementation of the proposal would require separation of highly integrated radio, and other, assets of both SCA and ARN and reallocation of those assets to members of the consortium and to a new digital joint venture”, a process that would involve “significant structural challenges, additional costs and operational financial and tax complexities”.

Kelly said SCA’s assessment of the proposal has focused on two key matters: “Would the proposal provide value for SCA shareholders? Would our shareholders be better off holding shares in a restructured ARN Newco? And secondly, how efficiently and effectively could the proposal be implemented to enable our shareholders to realise any such value?”

Kelly told Mumbrella he deliberately used words similar to those used by ARN’s declaration in order to rebuff their claims.

“We have not yet received sufficient information to reach a conclusion on either of these matters and there is no certainty that a transaction will eventuate,” he said on the investment call.

So, what’s the roadblock?

“Increasing our shareholder value has happened absent of the 18th of October offer, so not included in that offer,” Kelly tells Mumbrella after the earnings call.

“Both cost out, and the acceleration of profitability of LiSTNR: we don’t think it’s been factored in appropriately.

“This is an incredibly complex transaction in that, if it was just a cash offer, then all we’d be considering is that cash offer versus the value of our business.

“It’s not. It’s a cash offer of 30 cents, plus 0.753 per share, in a brand new entity which is ARN Newco, which is KIIS MMM and a digital JV which is not even in place yet. So we need to understand what the consortium views, in terms of the earnings profile, the assumptions for that earnings profile moving forward, so we actually can appropriately value the company.”

Kelly says discussions are being kept to a “very small group in SCA”.

“We’ve got five people focusing on it, including myself and our CFO. But yeah, there’s no certainty that transaction will eventuate, and that remains the case.”

In short: Kelly feels the company is now undervalued, especially with LiSTNR.

“Well, I guess I’m making that point,” he said. “I appreciate that the headline of our results today is difficult, as it is for other media, given the market conditions.

“What we’re trying to say, is all the work we have done in the six months really positions us well, no matter what the market conditions are, moving forward.

“So really, I think we have built significant value, which by its very nature, given that the offer came on the 18th of October, I don’t think it’s been fully appreciated by the market.”


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