Kerry Stokes’ $234 million raid on James Packer’s Consolidated Media Holdings last week has created an exquisite dilemma for Packer. Does he really want to spend more than $1 billion slamming the CMH door on Stokes, or would he prefer to be the recipient of the best part of $1 billion?
Stokes, if he has grand ambitions in relation to CMH, won’t be flustered by Packer’s initial response to the raid – spending almost $25 million to lift his Consolidated Press’ shareholding from 38.4% to 39.3%. That wouldn’t have any implications for Stokes’ ability to wrest control of CMH from Packer, if that were his intention.
If Stokes really wants to have a crack at gaining control of CMH, he will put a $3 a share-plus offer on the table, valuing CMH at more than $2 billion and Packer’s stake at more than $800 million.
To prevent Stokes from achieving a majority stake in the media investment vehicle Packer would have only two obvious options – he would either have to counter-bid, at a probable cost of more than $1.3 billion, or find a non-associated party prepared to spend more than $200 million to acquire the 10% or so of CMH that, with Packer’s holding, would prevent Stokes from achieving majority ownership.
It would take too long – in the context of a formal bid by Stokes – for Packer to ‘creep’ his way to that position by acquiring the 3% of CMH each six months that the Corporations Act allows outside a takeover offer.
Mind you, he probably wouldn’t need to look that hard to find an accommodating party. CMH’s key assets are a 25% stake in Foxtel, a 50% interest in Premier Media Group (PMG is essentially Fox Sports) and a 27% interest in the online employment group, Seek.
News Corp, which owns 25% of Foxtel itself and is CMH’s partner in PMG, would be keeping a close eye on the development of the CMH register.
It would probably detest the idea of having Stokes as a partner and co-shareholder in Foxtel – Stokes is a difficult character and the acrimonious and horrendously expensive C7 litigation wouldn’t have been forgotten at News. News might also see an opportunity of its own if control of CMH were up for grabs, given the perfect complementarily of CMH’s assets and its own interests.
Telstra, which owns 50% of Foxtel and has in the past been privately critical of the cost of Foxtel programming sourced from PMG, might also see some appeal in intervening to either prevent Stokes (who also owns more than $500 million of Telstra shares) from disrupting an increasingly prosperous status quo or to further its own ambitions and complicate his.
If it is forced/convinced to surrender its fixed line assets to the proposed National Broadband Network, a greater exposure to content businesses might be attractive and the Seek interest would be a nice addition to the portfolio of online investments it has been assembling.
It would appear a reasonable assumption that Stokes approached Packer before mounting his raid to see whether Packer’s Consolidated Press was a seller – it is what any potential bidder would do. If he did, self-evidently the approach was rejected.
Packer is far more enthusiastic about new media than he was about the old media empire he inherited, which is now owned by the private equity firm, CVC Asia Pacific. The enthusiasm isn’t emotional but is based on the long-term financial potential of the CMH portfolio – James is an unemotional investor and would almost certainly be a seller if he believed the price was full.
Stokes could test the extent of that enthusiasm by putting Packer in the position of either receiving $1 billion or spending well over $1 billion.
While reports of James’ strained finances are apparently overdone – he has piled up substantial amounts of cash in ConsPress and has significant borrowing capacity in place – the scale and unfortunate timing of his plunge into the international casino industry ahead of the global financial crisis has put a dent in his fortune. Investing $1 billion or so in a portfolio that doesn’t generate massive amounts of cash wouldn’t be a preferred option at this moment.
Against that, the Federal Government’s decision to spend up to $43 billion building a national fibre-to-the-premises broadband network, and its contemplation of not just structural separation of Telstra but even the forced divestment of its interest in Foxtel and the cable through which it is distributed in metropolitan areas, means Foxtel and PMG could become extremely strategic properties.
As Stephen Conroy said last week, the new network is going to radically reshape the media and be very disruptive to traditional media, particularly free-to-air TV. The rules that govern the ownership of traditional media, and the regulations that protect the free-to-airs from competition, will have to be significantly overhauled.
In the new environment, the free-to-airs have much to lose and Foxtel has much to gain as internet television services proliferate, compete for content and fragment further already fragmenting free-to-air audiences.
If Stokes does decide to bid and News and Telstra stay on the sidelines, Packer is going to have to decide whether that long-term upside is sufficient to not only compensate him for the opportunity cost of not selling out, but for the additional $1.3 billion-plus he’d have to invest to secure his control of CMH.
Is he a buyer or a seller? If Stokes does bid, Packer will be forced to show his hand.
This article first appeared on Business Spectator.
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