The results of the Macquarie Media Group capital management review were foreshadowed yesterday in BusinessDay by posing the question: "How can a listed entity with cash backing of $1.49 per unit, an entity which throws off cash earnings of 40c per unit from its operating businesses, be valued by the market at just 65c?"
The board of Macquarie Media Group provided the answer this morning: that 65c price (actually, 57.5c on Tuesday) won't last for long thanks to a major capital management initiative.
MMG announced that it will apply a substantial portion of its cash balance to funding an on-market buyback. A 10% buyback is to commence immediately, with shareholder approval to be sought for a further $50 million. It's a good move for unitholders.
Assuming that the buyback gets away at an average price of $1 per security, this would see around 33% of the group's securities bought back while the cash backing per security would increase to around $1.76.
As well as the buyback, MMG released an update on the operating performance of its businesses, showing a 4.2% revenue decline for the Australian radio and TV operations while the regional newspapers in the US showed a 5.6% revenue decline.
It's a creditable performance all up which would have allowed for an interim distribution of 18.6c per listed unit if the old distribution policy of paying out 100% of operating cash flow had been maintained.
However, as foreshadowed, MMG chairman Max Moore-Wilton has taken an axe to MMG's distributions. A distribution of just 4.5c is to be paid for the half year to December 2008, with no guidance on future distributions except to say that they will be "based on the specific needs of the business at that time".
Still, with a trading price of just 57.5c prior to this morning's release, the market had long given up hope of the previous distribution policy remaining in place.
The MMG board has come to its senses and will not be pre-paying any business level debt. The fact that this was even proposed as a possibility back in October smacked of a lack of understanding of the landscape in which MMG operates, a climate where cash is king.
Thankfully, with the benefit of a six-week capital management review period the MMG saw the error of such a strategy and is now displaying a commitment to maintaining the group's healthy cash balance to ensure "maximum flexibility for the potential future re-financing of debt facilities''.
The review will help to restore some confidence in the board and management.
However, questions remain regarding the independence of the MMG board and whether some previous decisions in relation to the relationship between Macquarie and the listed fund have been made on a truly "arm's length" basis.
Further, the matter of the 10 executives seconded from the group to run the satellite - as promised in the original prospectus - still needs to be resolved. There are presently just two.
Until the corporate governance issues are settled, MMG will continue to trade at a discount to its intrinsic value.
mwest@fairfax.com.au
BusinessDay
