Private equity group CVC is this week hosting directors of its Nine Entertainment Company, whose Channel Nine has the Australian broadcast rights for the Olympics. But they have nothing to celebrate. The Australian TV coverage itself may or may not lose a reported A$40m. But CVC is staring into the abyss. It is six years since Nine was acquired from James Packer for a dizzy A$5.5bn – double what it’s worth today. The London-based investor is now just a few months away from a A$2bn write-off and having to surrender ownership of Nine to the banks: a humiliating end to an expensive foray into Australian media.
This is some story of fortune, fame and folly, in four episodes and counting:
1. Stretching the bull market
CVC bought into Nine (then called PBL) in 2006, just before the collapse of media company values. James Packer, who had inherited the country’s dominant TV, magazines and online group on the death of his legendary father Kerry just 9 months before, was taunted by the media for his ‘post-inheritance rush’ out of mainstream media to concentrate on gambling investments. He looked like a young man in a dangerous hurry. The truth, though, is that even his mercurial father (who famously made a cool A$750m by selling and then buying back Channel Nine from the bankrupt Alan Bond in the late 1980s) would have jumped at CVC’s 11.5 x EBITDA price. His canny son also kept hold of high-rated stakes in pay TV – and managed to get the same pro rata price from CVC for lesser investments in ticketing and a sports stadium.
Even though the 2006 media markets were beginning to creak under the weight of digital competition, CVC’s local directors were euphoric about the Aussie deal. It seemed neat that Channel 9 changed hands 50 years after the launch of what had been Australia’s first television channel. It all played into what was (too soon) described as “a typical bull market deal”.
The CVC AsiaPacific boss enjoyed being described by newspapers as Australia’s “newest media mogul” with the limelight that media ownership brings in the land of Murdoch and Packer. But, now, it’s James Packer who’s smiling. His massive Crown casinos in Melbourne, Perth, and Macau are booming; and he recently agreed a deal to sell his remaining pay TV investments to Rupert Murdoch for a mighty A$2bn. That will help fund Packer’s tilt at the one big Australian casino (in Sydney) he doesn’t already own. CVC knows for sure which Packer business it would rather have bought.
2. Beaten by Channel 7
Soon after CVC took control of PBL/Nine, private equity peer KKR (runner up in the silent auction for Packer’s media group) did an almost identical deal with longtime rival Channel Seven. The difference was that KKR paid less but got more: after a lifetime of being a distant runner-up, Channel 7 (led by a longtime former CEO of Channel 9) became the TV leader within 12 months and hasn’t looked back since. Seven also beat Nine to the stock market flotation that both private equity groups sought. Another expensive humiliation for CVC.
3. A desperate deal
CVC knows there is no alternative to writing off its $2bn in Nine and walking away. It will now be keen to ensure its reputation is not trashed across the booming AsiaPacific: it wants to leave with good grace and whatever credit it can salvage. That will take some doing. Channel Nine has recovered somewhat, with strong audiences during the past six months for its Aussie edition of “The Voice”, and now the Olympics may help. But it remains Number 2.
By contrast, its ACP Magazines group (still larger than Seven’s Pacific Magazines subsidiary) has seen profits slide from A$270m to less than A$100m. But it gets worse. CVC last year sold Nine’s 49% share in the excellent Australian stockmarket listed Carsales (think Autotrader) for $566m ($4.92 per share). That same stake, just 16 months later, would be worth almost 30% more (the current share price is $6.25). This was a case of a media company prematurely selling a major investment in perhaps its most valuable, future-proofed business. That’s desperate for you.
4. Prospects of a break-up – and reinvention
The total value of Nine Entertainment Company could, perversely, be greater if it divests ACP Magazines, despite its profitability. A ‘pure play’ TV operator (with digital licences, strong production expertise and programme rights) could have a higher valuation than one seemingly bolted to a declining hard copy magazine business. CVC has tried everything to re-finance, sell or merge the business or parts of it with/to Australian and international companies. It has so far failed, partly because of the group’s squeezing debt levels, with hedge funds preparing to take control, and partly because of the tricky challenge of
separating ACP from Channel 9 in the pioneering and profitable NineMSN online joint venture with Microsoft. There are few enough well-funded buyers of consumer magazine businesses, let alone for a portfolio without the benefits of unfettered digital rights.
The lessons of CVC’s travails in Australian media might include something about not buying a business from a Packer, and then not crowing too soon about what a bargain it was – and how the gilded heir would, surely, come and buy it back when the time is right.
But let’s focus on ACP Magazines. Largely built by Kerry Packer over 30 years, it has long been one of the world’s best magazine businesses. ACP brands range from the Australian Women’s Weekly (a legendary monthly still read by almost 10% of Australian women – and with a brand to die for), through celebrity weeklies, lifestyle monthlies, sports, leisure, homecare, finance and food magazines. Some 60 best-selling publications for Australian women, men, children, and families. ACP has 50% of the whole Australian magazine market, sells some 90million copies annually, and is leader in almost every category. Traditionally, it has been streets ahead of Pacific Magazines.
For many years, the world’s leading publishing groups beat a path to Kerry Packer’s door with magazine deals. Hearst Corporation came to regret choosing Packer’s rival Fairfax to launch the Aussie edition of Cosmopolitan in 1972: he pre-empted them with the launch of a vigorous competitor Cleo. Sixteen years later, Packer bought all the Fairfax magazines including the Hearst partnership that today includes local editions of Grazia, Cosmopolitan, Harpers Bazaar and Madison – and which accounts for a significant chunk of ACP revenues.
The Aussie magazine market has always been strongly profitable, with cover prices, advertising market share , and profit margins ahead of UK counterparts which share the same newsstand sales model. Some sectors like food have generated substantially more revenues for magazine publishers in Australia, despite having just one-third of the UK population. ACP and Pacific have together accounted for up to two-thirds of the Aussie magazine market. In recent times, the agile, try-harder Pacific has been winning market share from its longtime adversary: its profits are getting close to those of ACP and its margins are now better.
These are challenging times, to say the least, for all magazines. Arguably, few publishers anywhere have closed, merged or divested titles on the scale necessitated by declining readership and advertising. ACP has even been growing its portfolio, having acquired no fewer than 10 new magazines (some in joint ventures) over the last six years. This has mitigated the decline in revenues but has, of course, reduced margins – and provided a strategic distraction for a magazines group which, like all others, needs to find new directions not new fragmentation. CVC’s cash-hungry executives got that point but have been frustrated by their apparent inability to reduce the number of titles – because all magazines seem to make a contribution to the highly-centralised costs of the business. Something, ultimately, has to give. That is what makes ACP so interesting to major magazine groups everywhere which need to snap out of their traditional mindset: most departed magazine readers and advertiser will not be coming back. It’s long-overdue time to look ahead and reinvent. You can do it.
That, of course, is easier said than done. But magazine publishers have to stop worrying about the numbers of magazines they publish – and also about advertising. They may always need (and be able to generate) significant advertising revenues. But the news-stands are groaning under the expensive weight of cut-price magazines, bagged supplements and other promotional inducements to customers - all in the name of maintaining circulation figures and hence advertising revenues. Not only will such promotion be largely wasted over the longterm, it is also perpetuating the real problem: many magazine cover prices are not viable in the digital, low-advertising era. Pumping out ‘special offers’ and more copies to attract fringe readers is the antithesis of sound longterm strategy. The recent lessons of the New York Times and, increasingly, other newspapers are that “on-target” readers will pay realistic prices. (If they won’t, are they target readers at all?). For magazine groups like ACP, three strategies may be key to future success:
1. Consolidate the portfolio to ensure a concentration of augmented “high value” magazines which can, then, command “realistic” cover prices. Scarcity and value are related!
2. Develop a well-defined, standardised multi-platform approach to core brands across tablets, hard copy – and web “TV” channels.
3. Provide click-through ecommerce on editorial and advertising across all media, including collaboration with retailers.
Magazine and newspaper publishers often talk about “digital first” in their strategies. But they need also to put “readers first” – and not be diverted by seismic changes in the overall advertising market.
The disconnect between falling magazine revenues and the almost-static number of magazines in many markets is troubling. The next owner of ACP Magazines may have the motivation to break the mould. Not for the first time, magazine professionals everywhere will be looking to the Australian market for inspiration.