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Australian Financial Review : October 17th 2006
FBA 014 The Australian Financial Review Tuesday 17 October 2006 www.afr.com 14 COMPANIES Ten to reveal the painful truth Neil Shoebridge KEY POINTS The TV company's profit is expected to be down sharply on last year. A slowdown in the capital city ad market is partly to blame. The pain inflicted on Ten Network by a weak free-to-air television advertising market and the revival of Kerry Stokes's Seven Network will be on show tomorrow when Ten releases its 2005-06 results. Analysts predicted the TV and outdoor advertising company would report a net profit of between $53 million and $62 million for the 12 months to August 31, down sharply from its adjusted net profit of $89.2 million in 2004-05. Since late March, Ten executive chairman Nick Falloon has been warning that Ten's full-year profit would be crunched by the slowdown in the $2.8 billion capital city TV ad market, Seven's ratings and revenue growth and the impact of Nine Network's Melbourne Common- wealth Games coverage in March. His warning was underlined in late June, when Ten revealed its earnings before interest, tax, depreciation and amortisation had slumped 50.6 per cent in the three months to May 31, with revenue down 10.2 per cent. (The TV sector accounts for more than 85 per cent of Ten's revenue and earnings). Ten shares have risen 9.8 per cent over the past six months, boosted by speculation it would play a key role ± as either predator or prey ± in the shake-up of the $12 billion media sector that will follow the easing of ownership restrictions. ''Ten's share price has decoupled from its fundamentals following the passage through the Senate of the media deregulation bill on Thurs- day [last week],'' Macquarie Research Equities media analyst Alex Pollak said. When the foreign ownership rules are ditched next year, Canadian company CanWest Global Communi- cations, which took control of Ten in December 1992, will be able to convert subordinated debentures that give it a 56.4 per cent economic interest into ordinary equity at no cost. CanWest's voting interest in Ten is 14.4 per cent and it has three representatives on the company's 13-person board. Ten's second-largest shareholder is Bruce Gordon's regional media company, WIN Corporation, which has increased its stake from 12.2 per cent to 13.04 per cent since late July. Mr Falloon is keen to reduce Ten's reliance on the free-to-air TV sector. Two years ago he said CanWest would be prepared to reduce its stake in Ten ''if the right deal'' came along. ''CanWest have made it clear that they would be fully supportive of a good deal,'' he said. Goldman Sachs JBWere media analyst Christian Guerra said Ten's fourth-quarter results might be stronger than the market expected, given the network's solid ratings performance this year and tight cost control. ''Positive outlook comments could buoy the stock, [but] with uncertain trading conditions, greater competition for ad dollars and a rising cost base, including Australian Football League, we do not expect to see outperformance in the short to medium term,'' he said. Grain loss confirmation sparks sell-down Tracy Lee GrainCorp relies on grain flowing through its silos for revenue. Photo: ROB HOMER '' At these prices you don't go out and sell.'' GrainCorp confirmed yesterday it would make a loss of between $20 million and $30 million in 2007 as a result of the drought. After slashing forecast receivals from the 2006-07 winter crop last week by up to 75 per cent, GrainCorp belatedly said it would make a loss, sparking another big sell-down of its shares. GrainCorp shares hit a 12-month low yesterday after shedding 7¢ to finish at $7.22. GrainCorp relies on volumes of grain flowing through its network of silos to generate revenue, and diminished receivals are an immediate drag on earnings. Austock Securities has forecast the total Australian grain crop to be only 13.4 million tonnes, with wheat making up 8.8 million tonnes. On those numbers, Austock anticipates a loss of $18 million from GrainCorp for 2007, but has predicted a return to profit in 2008 of $32 million. GrainCorp confirmed it would remain cash flow positive despite the loss next year and said it was still on track to meet its forecast net profit of between $34 million and $37 million for the 2006 fiscal year. It also affirmed its dividend of 50¢ a share. The announcement has sparked speculation South Australian grain handler ABB Grain and wheat exporter AWB will have to slash forecasts for 2007. Neither company was prepared to comment yesterday. Shares in ABB and AWB fell in sympathy with GrainCorp yesterday. ABB slipped 21¢ to finish at $6.18, while AWB tumbled to a record low of $2.59 after losing 19¢. The poor crop in 2007 has also raised questions over whether there will be a setback to GrainCorp's three- year strategic plan, which is expected to return $26 million by 2009. But GrainCorp chief executive Tom Keene said the company would still be able to reach its targets. ''While GrainCorp may defer some projects and accelerate others, we still expect to achieve the 2009 targets as outlined in the plan,'' he said. ''The company has reduced its costs for the 2006-07 harvest, has a strong trading position, and is focusing on increased port utilisation [by processing] non-grain products.'' Some market watchers said drought conditions were not necessarily a reason to sell. ''At these prices you don'tgoout and sell,'' said ABN Amro analyst Belinda Moore. ''If you take a long-term view and look through the cycle, when favourable conditions return the shares should also pick up.'' But Ms Moore noted that negative sentiment about the sector would drive share price weakness in the short term. Shares in other listed agribusiness companies, such as pesticide maker Nufarm, cattle company Australian Agricultural Company, Futuris Corp and fertiliser manufacturer Incitec Pivot, all fell yesterday. Sweeteners fuel rich appetite for T3 Tony Boyd '' Demand is so great that institutional brokers are ready to bid for shares.'' Telstra's T3 share offer has opened strongly with wealthy private indi- viduals showing a willingness to buy up to $1 million worth of stock each through retail brokers. Early indications of strong demand from wealthy investors came as the company's chief finan- cial officer, John Stanhope, and group managing director, products, Holly Kramer, yesterday kicked off a domestic retail broker roadshow. The roadshow is aimed at locking in demand from brokers for at least $1.5 billion worth of the $8 billion offer. Mr Stanhope and chief oper- ations officer Greg Winn will meet brokers in Adelaide today and then conduct a series of meetings in Brisbane on Wednesday. Chief executive Sol Trujillo and deputy chief financial officer Tarek Rob- biati will make presentations in Sydney and Melbourne. Yesterday's presentation by Mr Stanhope and Ms Kramer high- lighted the fact that individual inves- tors can buy up to 300,000 shares in the T3 offer, including 100,000 first instalments at the $2 retail offer price and 200,000 at the institutional price of $2.10. The T3 maximum retail allocation for an individual of 300,000 shares compares with the T2 maxi- mum allocation of 10,000 shares. Broker demand is an important component of the T3 offer because in return for generous commissions, the broking firms must commit to take stock irrespective of whether they can place it with clients. There is no specified number of T3 shares that can be allocated to the broker firm part of the offer. But bankers advising the govern- ment on the sale are hoping broker firm demand will match the level of demand in T1 when 20 per cent of the total offer was allocated to broker bids. The results of the broker bidding will be decided on Friday. It is believed that demand from wealthy individuals is so great that institutional brokers who would not normally make retail broker firm bids are ready to bid for shares. The private investors are especially attracted by Telstra's grossed-up yield of 20 per cent for taxpayers on the highest marginal rate of 47.5 per cent. Shares in Telstra yesterday rose 1¢ to close at $3.64, the second success- ive increase in the share price on turnover of 48 million shares. Lion's fight for Coopers finally ends Simon Evans '' This was the last of the outstanding cases that had to be resolved.'' Lion Nathan has formally hoisted the white flag on its failed $420 mil- lion bid for Coopers Brewery after losing the sixth major legal case over the push to force itself onto the share register of the South Aus- tralian company. Almost 14 months after launching its ambitious attempt to acquire a growth engine in the premium beer market by bidding for Coopers, Lion has finally given up after suffering the ignominy of being the loser in all six major legal actions it started. The final blow came yesterday when three judges dismissed an appeal by Lion in the Federal Court that had challenged the conduct of a Coopers' share buyback in 2003 at a price of $45.01 a share. The judges, Mark Weinberg, Susan Kenny and Bruce Lander, all agreed that Lion's appeal should be dismissed and ordered Lion to pay Coopers' costs in the matter. Lion launched the takeover bid for Coopers, an unlisted public company with 118 shareholders, on September 1, 2005. But the acrimonious battle, involving a string of legal actions, several complaints to the Takeovers Panel and dozens of threatening legal letters between the companies, has officially ended after the appeal was dismissed yesterday. Lion conceded there was little point in it pursuing the matter further. Coopers chairman Glenn Cooper said he was pleased there were no more cases pending. ''This was the last of the outstand- ing cases that had to be resolved,'' he said. Mr Cooper said the management and directors of Coopers could now focus 100 per cent of their time and energy on expanding what he called the ''exceptional growth'' Coopers had been experiencing. The takeover battle blew a hole in Coopers' profits in 2005-06, with investment banking and legal fees chewing up about $8 million, or about 45 per cent of the annual profit. Lion is understood to have incurred legal fees and investment banking fees of a similar amount, although the company declined to comment yesterday. But Lion did confirm it had given up on Coopers, although it was disappointed with the outcome of the legal action on the 2003 Coopers buyback. ''Coopers has only ever been one of a range of growth options for our company,'' a Lion spokesman said. One of the major weapons in the Coopers defence was a meeting in December 2005 in which Coopers shareholders voted to alter the company's constitution to prevent Lion exercising its third-tier pre- emptive rights to buy Coopers shares. Under the new constitution, no outside brewer is allowed to buy shares in Coopers. The Lion spokesman said unless the pre-emptive rights regime was changed ''questions as to whether we or any other company would be interested in Coopers in the future are hypothetical''. He said it was a ''missed oppor- tunity for value creation for both sets of shareholders''.