Seven Network shareholders will be asked to choose between two dud options when the scheme documents for the WesTrac acquisition are distributed in coming weeks.
Voting for the WesTrac acquisition will see the listed Seven Network transformed into a blended media investor and distributor of Caterpillar mining equipment.
Got a tip for Insider? email dsymons@fairfaxmedia.com.au
This is not what shareholders with an interest in the media sector signed up for when they committed to Seven Network, and the purchase looks expensive in any event.
The proposed acquisition multiple of 7.8 times forecast EBITDA for the year to June 2011 compares unfavourably with Finning International of Canada, the world's largest Caterpillar equipment dealer, which trades on a multiple of 6.6 times UBS forecasts for the year to December 2011.
Committing to the acquisition would also put in place a business combination that makes no sense and, in the tradition of most other conglomerates in an age of corporate specialisation, is unlikely to last.
The deal makers from Goldman Sachs JBWere and JP Morgan who are putting this transaction together can look forward to another good fee when the structure is unpicked in years to come.
However, voting against the deal may not be the answer. One of the key benefits of the WesTrac acquisition is that it resolves the question of how Seven deploys the billion dollars in cash that is sitting on the balance sheet.
It will largely be used to pay down WesTrac debt, a relatively low-risk strategy when compared with previous Kerry Stokes master strokes, one of which saw the company deploy $715 million punting the market in ''high-yielding, liquid securities of major corporations'' just as the extent of the subprime crisis was unfolding. Significant write-downs followed.
Voting down the deal would risk exposing Seven Network shareholders to further flawed investment decisions. This is an unlikely basis for approving a company-transforming deal, but on this occasion it is the fear of what Stokes might do next that looks set to get the WesTrac acquisition across the line.
However, with investors marking Seven Network shares down by 5 per cent yesterday, shareholder approval for the deal looks set to be grudging, at best.
SCEPTICS ABOUND
IT IS not just Seven Network's ordinary shareholders who are sceptical about the WesTrac acquisition. Until yesterday, holders of Seven's TELYS3 hybrid securities thought their notes would most likely be redeemed for face value in May, and the market was pricing them accordingly.
The notes promptly fell 5.5 per cent on yesterday's news that, as a consequence of WesTrac, the hybrids will remain on issue, albeit with the coupon stepping up 2.5 per cent from current levels to 4.75 per cent above the bank-bill rate.
Seven Network's preparedness to maintain $500 million of expensive hybrid funding may provide a clue to Stokes's desire to see the WesTrac deal approved and Seven's cash deployed in paying down WesTrac debt.
WesTrac carries a debt burden of $1 billion, around six times EBITDA.
While Stokes's representatives argued yesterday that this was a comfortable financing structure, others in the market thought that, at first blush, WesTrac looks overgeared. Accessing the Seven Network cash balance may provide a welcome opportunity to avoid the risk of refinancing that would otherwise have loomed in 2012.
VALUATION RISK
RECENT comment in this column regarding increased pressure from banks on property trusts with office tower assets has prompted feedback from bank insiders providing a guide to the magnitude of the issue.
Property worth tens of billions of dollars may be affected by a changed approach that sees banks pushing for reduced loan to valuation ratios and a less lenient approach from valuers.
It seems banks have identified office towers as a high-risk zone because, all too often, the valuations used to support loans have been artificially inflated by expert valuers with close relationships with landlords.
Concerns emerged last year when bankers noted that sharp declines in sale prices were at odds with only modest valuation falls showing up in annual property valuations.
When banks appointed independent experts to undertake spot checks, the resulting assessments were often about 20 per cent lower than the landlord's annual valuation.
The risk is that while loan to valuation ratios may be comfortably positioned based on annual valuations, if property values were more accurately marked to market, the banks' buffer would evaporate.
Westpac looks to have led the big banks in taking decisive action, appointing a new team to take whatever action is needed to reduce the risk of such losses.
Property owners have been put on notice that they will have just one month to raise additional equity if required following a lower bank valuation.
Other banks are following Westpac's lead in appointing independent valuers to more properties this year. In addition, the entire banking sector is wary of fresh exposure to the office sector.
Market feedback suggests that arrears levels are also stepping up, adding to valuation-related anxiety.
Office pricing may be set to take a tumble if forced sales are pursued in an environment where little finance is available to buyers. If the situation is not carefully handled, bank balance sheets might also take a hit.
dsymons@fairfaxmedia.com.au
