Just how much trouble is Seven in? (Answer: A lot more than you probably realise)

With Seven West Media's share price at an all-time low and debt pile close to an all-time high, the company's ASX update yesterday revealed a tough outlook for 2020. Mumbrella's Tim Burrowes asks what next for CEO James Warburton.

Less than four months ago, Seven’s new CEO James Warburton took to the stage at Sydney’s ICC for the most important public appearance of his career.

After his failure as boss of Network Ten, career recovery at V8 Supercars and redemption selling outdoor company APN Outdoor to JC Decaux, the moment marked his return to the top rung of Australian media.

It would require all of his his impressive sales skills to offer his customers at the Upfronts a vision of how he was going to turn around Seven West Media’s fortunes.

On the night, he delivered, promising to build on the early momentum of a series of deals revealed over the previous days.

There were four big parts to the plan.

Seven would fold regional affiliate Prime into its offering to become the first network to offer a single national point of sale for both metro and regional audiences.

It would sell its least-loved child, Pacific Magazines, to rival Bauer Media.

The TV network would get back to basics on its broadcast programming.

And it would slightly reduce its debt pile by offloading its Western Australian radio outfit Redwave to Southern Cross Austereo.

It was a seriously impressive performance thanks not just to Warburton’s nerveless demeanour, but also the full-on, tightly scripted, high-end production showing off what a big broadcast company is capable of staging. It felt like a company with new energy. Even chief revenue officer Kurt Burnette, a three-decade veteran with the network, had a new vigour about him.

But a few weeks later, that momentum ended.

The Prime Media deal faltered thanks to the blocking votes of Prime investors Bruce Gordon and Antony Catalano.

And that same week, the Australian Competition and Consumer Commission (ACCC) intervened on the Pacific Magazines sale, suggesting the deal risks reducing competition and quality in the mag market.

In the New Year, it got worse, with Seven’s ratings promises in tatters. A lacklustre cricket season struggled to rate big in either the short-form Big Bash or Test cricket. It wasn’t helped by rival Nine’s second year of broadcasting the Australian Open enjoying ratings-friendly runs from Aussies Ash Barty and Nick Kyrgios.

The ratings struggle began to create a vicious cycle of the sort previously experienced by third network Ten. The failure to find audiences, meant that fewer potential viewers saw promos for the coming programming slate which in turn led to more lost audiences.

The first big challenge for Warburton’s new chief marketing officer, his former APN Outdoor colleague Charlotte Valente, was to get Seven’s first tentpole reality show of the year, the rebooted My Kitchen Rules: The Rivals, off to a good start.

But that lack of a solid cricket audience robbed the network of a key launch platform.

From the beginning, MKR flopped, badly.

It was no surprise that at the start of this month MKR’s Sunday night debut was outrated by the men’s tennis final on Nine. But it was also beaten that night by the final episode of Ten’s I’m A Celebrity.

And the next night, things got worse for MKR.

Nine’s Married At First Sight roared to a debut metro audience of 1.154m. Meanwhile, Ten’s new series of Australian Survivor: All Stars attracted a metro audience of 624,000, the first time it had beaten MKR, which in turn rated just 517,000.

Humiliatingly, MKR was even beaten into fourth place in its timeslot by an ABC Back Roads episode on carnival life in Far North Queensland.

Before long, industry commentator Rob McKnight had called it, labelling MKR as dying “a slow, painful death”.

If ratings was the only issue, that would arguably be less of a big deal. Shows reach the end of their lifespans and are replaced. And Seven is still market leader in breakfast, daytime and news programming, and still highly competitive in the key advertising demographic of 25-54.

Plus, Seven has The Olympics to look forward to, come July.

However, Warburton (who rarely misses a chance to remind the market that he inherited all of these issues from his predecessor Tim Worner) also faces bigger headaches. The media industry – and the $4bn TV sector in particular – has been experiencing its biggest falls in revenues since the GFC.

Industry body Think TV revealed earlier this month that revenues from July to December were down by 5.9% compared to the same six months a year before.

But while this headwind affects all of the TV networks, Seven is arguably the least well placed to weather the storm. Nine, now a much bigger multi-media conglomerate since the Fairfax merger, has the market’s confidence thanks to a strong ratings year in 2019. And Ten’s owner CBS appears to be in it for the long term.

Seven, meanwhile, has a high level of debt. In yesterday’s update to the market, it revealed that despite rounds of cost cutting, at the close of its accounting in December it owed the bank $683m. That comes as something of a surprise, considering its borrowings were $653m six months earlier, and the company had been signalling that it was reducing its debt level.

Even though Seven would argue that number did not capture the $28m sale of Redwave or the $40m it hopes to get from Bauer Media for Pac Mags if it can get the deal past the ACCC, the $541.5m net debt level Seven presented to the market yesterday is high.

The additional $20m of cuts slipped out in yesterday’s update – above the previous $45m already implemented – won’t be the answer either.

For a company whose profit before tax for the past six months declined by 20% to $119m, repayment is starting to look like a helluva mountain to climb, even if timing meant that the $28m Redwave sale dollars and Pac Mags sale aren’t in that big statutory number.

With the company paying 3.3% interest on its borrowings, that amounts to more than $20m a year on its own.

No wonder Seven announced yesterday that it would not be paying a dividend to shareholders. Again. It can’t afford to.

And no wonder the share price slumped yesterday by 21%, all the way down to 20c – down from the 40c on that day back in October when Warburton took the stage.

In just four months Seven’s share price has halved

So anybody who bought shares in Seven West Media the day after Warburton’s big sell has since lost half their money.

Seven is now a company with just a $315m market capitalisation.

Even a year ago it would have been astonishing to think that rival Nine would be worth almost 10 times as much as Seven, at $2.96bn.

It becomes a reasonable question to ask whether Seven can keep going in its current state.

This week, Crikey’s Glenn Dyer was among the first to predict that it might not, writing: “In fact, at this level, investors are saying it is highly doubtful that the network and the company will be around at the finish of ratings in early December in its present form.”

There are a lot of parallels with Ten’s situation back in 2017 – although admittedly it seems like longer ago.

Like Seven with MKR, Ten had been going through some rough ratings weeks with the failure of The Biggest Loser.

And ad spend on TV had fallen by 2.2% year-on-year.

Even with cuts, Ten was loss making, and stuck with some expensive content supply deals, including with CBS and Fox.

In Seven’s case, the expensive content is sports rights, including the cricket and the forthcoming Olympics.

As James Thomson pointed out in The AFR yesterday, as well as writing down the value of its TV licence again, this time by $62m, Seven has carved out $52m to provide for onerous contracts – effectively, it’s admitted that it will lose money on the cricket and the Olympics.

As Thomson points out: “Seven had no problems trumpeting its cricket and Olympics rights wins at the time, despite the fact they’ve turned out to be duds.”

Seven paid too much. Nine’s CEO Hugh Marks will struggle not to say the word’s “I told you so” too loudly.

That’s if the Olympics happen, of course. I’m not sure I believe Warburton’s claim in his interview with Mumbrella yesterday that he is giving “absolutely no thought” to what to do if they’re delayed or cancelled because of the coronavirus.

It’s similar to when Ten’s then programming boss David Mott declared there was no Plan B if The Renovators failed.

(Narrator: The Renovators failed.)

And sticking with the Ten comparison for a moment longer, it owed the bank $200m – not so much compared to Seven’s $683m.

When major shareholder Lachlan Murdoch took his representative off the Ten board, it triggered a series of events which saw the company pushed into administration when its directors concluded the company could not meet its obligations. It ultimately resulted in CBS becoming its new owner.

Stokes: Seven’s proprietor will decide

Which brings us on to the most important factor in what happens next: Seven’s major shareholder and chairman Kerry Stokes. In a complex arrangement, Stokes owns 65.8% of Seven Group Holdings. And in turn, Seven Group Holdings owns 41% of Seven West Media.

Based on Warburton’s counsel, ultimately, Stokes will need to decide what to do.

It’s hard to believe Stokes would relinquish control of the network after quarter of a century. Conceivably, the low share price could even be an opportunity for him to increase his stake.

And the pressures on the board about whether the network is a going concern are nowhere near as dire yet as they were for Ten.

But the declining share price makes it a harder conundrum to solve. When Ten was thrashing around, it went through round after round of recapitalisation, issuing new shares to bring in more money.

This meant that each time the shareholders had to decide whether to put their hands in their pockets to take part, or see their shares diluted.

But of course, as share price declines, more new shares have to be issued to bring in the same amount of capital, which only dilutes holdings even further and in turn drives the share price ever lower.

With the caveat that hope is not a strategy, Seven’s best hope is for the media recession to come to an end. TV is still a good business. Fundamentally, for marketers looking to reach a mass market, quickly, television advertising is still a good answer.

But the after effects of the bushfire disaster and the coronavirus has put retail and the travel industry in crisis. And the automotive sector was already there.

A quarter of a shrinking economy now seems inevitable. Two quarters means an economic recession, and commercial media tends to struggle disproportionately in a downturn.

In his call with investors yesterday, Warburton said he was not planning on an improvement in the local ad market.

Another option for Seven is some sort of merger with another player. The News Corp rumour keeps coming back, although there would be media ownership rules to overcome.

Many concluded that Stokes’ reason for bringing in Warburton last year was because he proved his ability to do deals during his time with APN Outdoor.

And Warburton’s time with V8 Supercars, which was owned by Archer Capital, also gave him experience with the world of private equity.

Plenty of media companies have ended up selling all, or half of themselves to private equity before refloating on the ASX a few months or years down the track.

While ownership may change, it seems highly unlikely that Seven itself will disappear.

Nine staved off bankruptcy in 2012 before returning  to the ASX in 2013.

And Ten stayed in the market after going bust and being picked up by CBS.

It’s starting to look like Seven’s turn to go through the process.


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