On Thursday, a very short ASX announcement from Ten raised some very big questions.
Siobhan McKenna, Lachlan Murdoch’s representative via his investment company Illyria, had left the Ten board. A few minutes later, it was announced that she was taking a new role working with him at News Corp.
With media matters involving the Murdoch family, there’s usually a reason for everything. The obvious first question is this: Was McKenna’s move about what’s going on at Ten, about News Corp’s growing television ambitions, or both?
McKenna: Off the Ten board
Let’s start with what’s going on at Ten.
After a relatively stable two or three years, the network is in trouble again.
It’s a tough time to be in the television business. You can do everything right (and there is indeed a great deal of respect across the industry for the Ten management team), but market forces and consumer habits can still undo you.
That’s what appears to be going on now.
Most immediate, but arguably the least of Ten’s problems, are the ratings.
It’s been a rotten few weeks, which are only going to get worse. Last week may have seen the finale of the third season of I’m A Celebrity Get Me Out Of Here, but even that wasn’t enough to prevent the humiliation of another fourth place finish behind The ABC.
Ten started the year with five tentpole series – I’m A Celebrity, Biggest Loser, Masterchef, Bachelor and Survivor – on the slate. Given the available resources, it’s probably as good a lineup as any programmer could hope to deliver.
Celebrity’s ratings were just about good enough. But the attempt to update The Biggest Loser has failed. Thursday night’s metro ratings of 387,000 was just dismal.
Biggest Loser: Ratings disaster for Ten
With a Sunday-Monday-Tuesday-Wednesday lineup of Biggest Loser this week, it’s going to be another fight for Ten to avoid finishing fourth.
And given its relatively modest resources, there’s little prospect of dropping the show early. Which heralds a month or more of bad ratings until Ten can get its trusty format Masterchef back on air, probably after easter.
This meanwhile comes against a backdrop of a tough (and short) media market. According to SMI, adspend on TV was down 2.2% year on year in January, and advertising fell by a worrying 6% for TV in February.
It’s only a month since Ten updated the ASX, warning that the company is once again loss-making.
By the time we hit the end of its financial year in six months time (relatively unusually, Ten’s financial year runs from September to August), the company may have made a loss of $20-30m, it warned.
It’s no surprise that in the month or so since, the Ten share price has declined by about a third, from 92c to 62c. The company now has a market capitalisation of just $225m. By contrast, rival networks Seven West Media and Nine Entertainment Co both retain their memberships – for now anyway – of the three comma club, above the $1,000,000,000 market cap.
But it’s not just ratings and ad spend that are squeezing Ten.
With a level playing field, it would probably be going okay. The 2015 shift to MCN as its sales house, and last year’s new affiliation deal with WIN with a higher fee than WIN previously paid Nine, both seem to have worked out. But anecdotally, Ten is struggling to pull in the important premium advertising (although the network contests this, telling me premium advertising is on the up).
But there are far bigger factors. Perhaps the biggest, but one without full visibility, is Ten’s US content supply deals, particularly with CBS and Fox. The deals, struck when Ten was in its last episode of financial trouble, are understood to be far more expensive at their back end which is now approaching. Hence, despite the fact that previous CEO Hamish McLennan took a lot of costs out of the company, Ten’s content expenses are still rising. It’s previously been reported that the CBS deal (including the likes of NCIS) alone is an annual $50m a year, and still has some time to run.
That’s particularly painful when US content doesn’t rate like it used to.
But there’s another looming issue.
In just over nine months’ time, on December 23, the company’s $200m loan facility with CommBank expires.
In its last annual report, Ten listed this as one of the business and strategic risks facing its prospects if:
“the company is unable to negotiate and refinance debt as a result of internal and external influences. The existing $200m revolving cash advance facility expires on 23 December 2017. The company has commenced discussions with a number of parties in order to assess and consider the refinancing options available.”
According to that same annual report, which was published four months ago, the company had drawn on $65m of that loan. Given that Ten is loss making, there seems no obvious means of repaying the loan before it comes due. The interest on the loan, along with establishment fee, commitment fee, plus fees to the shareholders for backing the loans will also come due.
Which is going to lead to interesting conversations with the three shareholders who guaranteed – and will therefore be on the hook for – the loan: Lachlan Murdoch (who at the time was chairman of the company), James Packer and Bruce Gordon.
Murdoch: Guarantor on Ten’s loan
Where this becomes really important to the future ownership of Ten though is that – in a condition of the loan little discussed in the press but declared to the ASX and approved by the independent directors at the time – subject to the media ownership laws, the trio could even end up as the new owners of the network.
The details came in a letter to shareholders back in November 2013.
The obscure legal phrase “subrogation rights” could become quite important.
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If Ten can’t pay back CommBank, and can’t raise new funds from elsewhere, it will probably end up in receivership.
If I was providing any sort of service to Ten in the coming months, I’d be keeping a very tight leash on chasing my invoices.
When a company ends up in receivership, obligations to staff and those who have secured their debts against the assets tend to be the only things that get paid.
In a nutshell, if CommBank doesn’t get its money from Ten, it can get it from Murdoch, Packer and Gordon. Which means that one possible outcome is that as a result they end up having a say over the future owners.
As Ten declared to the ASX at the time of the loan deal:
“Failure of Ten to satisfy an reimbursement obligation… would confer upon those shareholder guarantors certain rights… this may lead to the shareholder guarantors having the right to enforce that security and appoint a receiver which may conduct a sale of Ten group assets in which the shareholder guarantors may participate.”
You can see why the departure of Lachlan Murdoch’s representative Siobhan McKenna from the board starts looking like very interesting timing. Particularly the fact that he “does not propose to nominate” a replacement.
Really? Put yourself in Lachlan Murdoch’s shoes. Now back working at News Corp, you own about 9% of Ten. The family aligned-Foxtel owns another 15%. You’re on the hook as the guarantor of a $200m loan. And you’re not interested in having a director in the room when the board gets to discuss what happens next?
There must be a really good reason for feeling unable to have a director on the board. Could the need to manage conflict of interest in any forthcoming carve-up of Ten be the reason not to nominate someone?
For the remaining five directors, the next few months are going to be stressful. And let’s remember, they aren’t going to have much experience of running the company to draw upon.
Other than David Gordon – who’s been on the board since 2010 and chairman since 2015 – there’s almost no institutional memory among the directors. None of them were on the board even this time last year.
Debra Goodwin joined the board in August 2016.
WIN (Bruce Gordon’s TV company) boss Andrew Lancaster joined last July.
Andrew Robb joined last July.
And Foxtel boss Peter Tonagh joined last March.
In the next few days, these five people are going to be updated on Ten’s current financial outlook. That will also include the thoughts of management consultants McKinsey, who are currently in the building.
They’ll be painfully aware of their legal responsibilities as company directors, and the consequences of allowing a business to trade while insolvent.
The directors will need to approve a plan to make the company profitable again – while being fully aware that they can’t simply cut costs because falling ratings would drive away the advertisers even faster.
And they’ll also be keenly aware that one of their key financial duties is to affirm their belief that the business is solvent as a going concern.
The ASIC definition of insolvency is instructive here: “An insolvent company is one that is unable to pay its debts when they fall due for payment.”
All that before the half year update goes to the market in about three weeks’ time if it follows the same timetable as last year.
So to stay in business, the board will presumably need a plan for how to pay back the CommBank loan at the end of the year. And while that may not need to be in place by the time of the end of half update, the pressure will grow and the share price will fall as the end of 2017 approaches.
Obviously this could be as simple as persuading CommBank to extend the terms. But would the original three shareholders agree to extend their guarantees? I doubt it.
Or could there be yet another fund raising? But who’d want to invest in a loss-making network which is about to announce another impairment in the value of its TV licence, as it told the market last month.
Or of course, they could find a buyer for the network. Which didn’t go terribly well last time they tried that.
Which isn’t to say that the company has zero value. Whoever ends up as the next owner, there is still a route for Ten to be profitable as a super low cost offering – even more low cost than it is at the moment. A company that brings in advertising revenues of $676m a year has to be capable of being profitable somehow.
But if the next owners were to be Australian-based media companies, the law would need to change first.
Media ownership laws aside, News Corp feels like the future owner:
- Foxtel (which is of course 50% owned by News Corp) now owns 15% of Ten.
- News Corp boss Lachlan Murdoch owns 9%;
- The ad sales are already done by MCN (which is mainly owned by the News Corp-aligned Foxtel).
- Most of Ten’s biggest reality shows are already produced by the News Corp-aligned Endemol Shine.
- One of Ten’s key US supply deals is with the News Corp-aligned Fox (via sister company 21st Century Fox)
But of course, the media ownership laws would have to change first. And by a funny coincidence, Australia’s sleepiest minister Mitch Fifield is bringing them back to Parliament this week, for what’ll be the last chance to get change through this side of Easter.
As Crikey’s Glenn Dyer argued on Friday:
“The winner from such a deal would be News Corp, which, if the “two out of three” rule were removed as proposed, would be able to buy Ten (and add it to its Foxtel and Sky News broadcasting assets). And the case for the ACCC approving such a transaction would be strengthened if the participants could plausibly argue that Ten was in danger of going insolvent due to its inability to source new cash or meet its debt obligations.”
And of course News Corp has some obvious content it could air on the Ten-owned channels including its recently achieved 100% ownership of Sky News (can the merger of the News Corp and Sky News newsrooms be far away?), and its ownership of Fox Sports.
But at the right price, Ten might also be interesting to potential overseas organisations with big libraries like Viacom which bought Channel 5 in the UK in 2014 before giving the sales house role to (you’ve guessed it…) the News Corp aligned Sky.
There are still too many moving parts to say how this one will end.
But what does seem certain is that Ten will finish 2017 in a radically different place to the way it began.