Debt deal saves Channel Nine — for now

Nine CEO David Gyngell has secured a lifeline for the ailing television network. AAP

Channel Nine is a station of two tales. The first is the positive story its viewers see: smiling in-house celebrities, reliable newsreaders, and blockbuster programs such as House Husbands, The Voice, Big Brother and sport — particularly cricket, rugby and the Olympics. Superficially, its a ratings success story. In the metropolitan market it’s news and current affairs is doing better than its greatest rival, the Seven Network. More generally, its programming is competitive.

Until this week, the other tale was a badly kept secret. It’s about a fight for survival, which began five years ago when James Packer sold the network for a hefty $5 billion. Private equity CVC Asia Pacific took on the majority share of the network, but like a talented horse with too much weight, slowed it to a near standstill with $3.6 billion of debt.

This week the Nine Entertainment Co. Group was thrown a lifeline when CEO David Gyngell negotiated with two global hedge funds, Oaktree Capital and Apollo Global Management to acquire Nine’s debt in a fire sale. The major lenders will convert loans to a dominant shareholding, owning a 95.5% stake in Nine. The Goldman Sachs-led second-tier lenders would get a 4.5% share, or about $100 million —a tenth of what they had initially invested.

Gyngell heralded the deal as “Nine’s back!” But how did Nine lose its way, after dominating the small screen for so long?

The network began in 1956 when James Packers’ grandfather Sir Frank Packer acquired broadcasting licences for it in Sydney and Melbourne. From the beginning, it was a prevailing cultural force with shows like Jimmy Hannan’s Saturday Date and Graham Kennedy’s In Melbourne Tonight.

In the late 1970s, Sir Frank’s son Kerry used the Network to bring sport into Australian lounge rooms, entertaining millions when he created the World Series Cricket. He then won the television broadcast rights for all first class cricket games, a triumph that has continued, and is up for renewal in March 2013. Gyngell’s next task is to find around $300 million, if it wants to keep the cricket on Nine.

Around the time of the World Series, Nine was strengthening its news and current affairs programming with the launch of 60 Minutes in 1979. The show was a crowd-pleaser, turning many journalists in to household names, particularly its original reporting team of George Negus, Ian Leslie, Jana Wendt and Ray Martin. But, by the 1990s it lost its ratings supremacy when television news and current affairs fell out of vogue with viewers, giving way to drama, and later, reality television.

As the 1987 stockmarket crash hit, Kerry sold the television network to Alan Bond for $1 billion. It was an astute move at the top of the market, which was to be replicated by his son James in 2007. Kerry bought back the business three years after selling it, for a reported $300 million profit when Bond was on his financial knees. He famously said of the lucrative deal: “you only get one Bond in your lifetime, and I’ve had mine”. In 2006 and 2007, James split his gaming assets from his media business and sold the controlling interest of his media assets to Adrian MacKenzie, the Australian partner of CVC Asia Pacific. Like his father, James sold at the top of the market, just before the next financial crash.

By 2008, the global financial crisis had hit. As any media analyst will testify, advertising is one of the first markets to suffer in an economic downturn. Advertising revenues fell across the media spectrum. Like other traditional media, free-to-air-television, is a now structurally challenged business model that is losing its lifeblood of advertising revenue. About 2% of its industry share was cut between the GFC and now, according to media analyst reports.

Of all the media, newspapers were hardest hit, with a 5% loss of advertising industry revenue share during the GFC. But there were also winners: free-to-air television rivals, pay television and the Internet. Both sectors increased their share of advertising spending in the media industry during and after the GFC. Admittedly they were building from a lower base, but their share continues to grow much faster, and at the expense of traditional media.

Then, in September this year, the beleaguered CVC had a last attempt at reducing its debts. It sold ACP Magazines to German publisher Bauer for $500 million, reportedly a few hundred million below what it initially sought, effectively ending more than 70 years of iconic Australian publishing. Frank Packer had established the publishing company in 1933, bringing Australian readers, especially women, household titles such as The Australian Women’s Weekly and Woman’s Day.

Undoubtedly, Gyngell has done remarkably well to restructure the ailing business and to avoid its imminent receivership. It is a major coup that he was able to turn the business from being debt-laden, to reportedly debt-free. But the future of Channel Nine is not certain. The hedge funds know more about profits than operating a television network, and will be seeking to resell the business at the first available opportunity.

Moreover, free-to-air television still faces the same challenges to the fundamentals of its business that it did before the latest Nine restructure. This is true for all of Australia’s free-to-air networks. Today, Channel 10 posted a loss of $12.9 million. Adding to its woes, the sale of its outdoor advertising division, Eye Corp, has stalled, sending its share price to a new low of 31 cents. Seven is slightly better positioned, but its parent company also has a falling share price to contend with, and faces the same challenges of developing new media products to cash in on the growth in the digital advertising market. They must also work to retain existing advertisers, using product placement and other methods to combat time shifting, and viewers’ recording of programs to avoid ads.

There is no single easy solution to rebuild advertising revenues, particularly when media audiences have fragmented. Research shows younger viewers are not so interested in traditional television. They have a plethora of screen choices competing for their time and attention. These include Internet and mobile gaming, IPTV, digital downloads, pay TV, online video, Internet browsing and live streaming. And, where their eyes go, so do advertisers. Nine is not out of the wilderness yet.