Analysts are expecting a frenzy of merger and acquisitions activity in the media sector this year if the media ownership rules are relaxed or rescinded. The Abbott government has made it clear that it wants to scrap the cross-media ownership restrictions, arguing that the restrictions are archaic in the internet age.
The share prices of traditional media companies have been hit hard as they battle falling print and television advertising. If the rules are scrapped, it is likely that the regional television operators and perhaps APN News & Media, the Australasian newspaper publisher and radio licences holder, would be the first to go.
”Everything small would go,” says the managing director of media research firm Fusion Strategy, Steve Allen. ”APN would go, WIN [Television] would go and Prime would go.”
Southern Cross Media could be bought by Nine Entertainment, he says. ”All of these mooted mergers have cost-out scenarios that are really what they are all about from a shareholder’s point of view.”
Tim Montague-Jones, a senior equity analyst at Morningstar, agrees that the small traditional media companies would come into play, with Nine mooted to buy regional TV operator Southern Cross or WIN Television, which is owned by billionaire Bruce Gordon.
Among the metropolitan media, the most likely deals would appear to be Rupert Murdoch’s News Corp buying the struggling Ten Network, whose chairman is Lachlan Murdoch. However, News owns half of pay-TV operator Foxtel, and if the cross-media rules were rescinded, it would fall to the Australian Competition and Consumer Commission to rule on proposed takeovers.
Of the media rules, two are the most important. One is the rule restricting a media company to owning no more than two out of three free-to-air-television, radio and newspaper assets in one metropolitan market. If that rule were rescinded, Fairfax Media, the owner of the Sydney Morning Herald and The Age and radio stations in Sydney and Melbourne, could merge with Nine or with Kerry Stokes’ Seven West Media, analysts say.
The other is the rule banning a commercial TV licence holder from reaching more than 75 per cent of the national population. If this rule were scrapped, the door would be open for metropolitan broadcasters, such as Nine, Seven and Ten, to buy the regional TV operators.
Although some of the traditional media stocks, particularly the regional players, could be good share-buying opportunities if they were to become takeover targets, the mergers and acquisitions game is a high-risk one for investors.
The idea is to buy shares in the company and then sell them for a profit after it becomes the subject of a takeover offer. Usually, the share price of the target company rises on a takeover offer.
”If you are making an investment solely on the potential for a takeover, you really are taking a gamble,” says James Samson, an equities analyst at Lincoln Indicators.
Investors should always invest on fundamentals, with any takeover premium seen as a windfall, he says.
Lincoln Indicators rates the companies it covers by their financial health. A strong rating means the company has a strong balance sheet and good cash flows.
Regional TV operator Prime Media Group has a strong health rating from Lincoln Indicators. Prime’s shares are on a cash yield of 7.5 per cent for the year to June 30, 2014. The gross yield (after franking credits) is almost 11 per cent.
Prime’s strong financial health gives investors greater protection should it not become the subject of a takeover offer, Samson says.
TV production and distribution company Beyond International could become a target for News or Telstra, Samson says.
The cross-media rules do not appear to prevent a takeover of the company now, but relaxing the rules could increase interest in it. With a market capitalisation of only $100 million, Beyond International could be easily swallowed, he says.