Tractors and television
Kerry Stokes has done it again. Ian Verrender reports.
WHO said conglomerates were dead? If Perth entrepreneur Kerry Stokes gets his way, the Seven Network will morph into a rare breed of listed company with a portfolio of businesses that have nothing in common.
In a shock announcement yesterday, Stokes unveiled the mother of all related-party transactions. The proposal involves merging Stokes' mining equipment servicing company, WesTrac, into Seven through a share swap that will leave Stokes debt free and lift his stake in the new Seven Group from 48 per cent to 68 per cent.
What makes the deal even more interesting is that it gives Seven Network an implied valuation of $8.70 a share, which is well above the market price, but below the company's net tangible assets of $10.18 a share, according to the latest set of accounts filed yesterday morning.
Even if the company's latest tax liability is thrown into the mix, the deal is still pitched below net tangible assets.
Put simply, Stokes is getting an incredible deal. He is capitalising on the market's under-appreciation of the Seven listed stock. He is increasing his stake in a media empire through an implied value of $8.70 a share versus the directors' valuation of $10.18 a share.
It explains why Stokes is issuing cheap shares rather than paying cash.
On first cut, shareholders were less than impressed. Shares plunged 5.2 per cent to $6.98, on a day when the rest of the market was up 1.6 per cent.
The general consensus is that the proposal is acquisition by stealth. Stokes has spent the past few years building his stake in Seven from 30 per cent to 48 per cent, at little or no cost. The board has allowed him to do this by issuing share buybacks that he has not participated in.
The deal yesterday, which transfers $1 billion of debt attached to WesTrac into Seven, not only lifts his stake in the newly created Seven Group to 68 per cent but Seven will use some of its cash to reduce the WesTrac debt.
The endgame could be a few more share buybacks - without Stokes' participation - to get him up to 90 per cent compulsory acquisition, and then it is good night to the publicly listed Seven Group and hello to Stokes' private empire.
The company point blank rejects this contention. It uses the wacky logic that if Stokes goes beyond 70 per cent, the company would be kicked out of the S&P/ASX index.
But this is all hypothetical until minority investors cast their vote on the deal in mid-April. For institutional shareholders such as Dexia Ausbil, which holds 7.2 per cent of the stock, there are too many moving parts to decide quickly whether the deal is a goer or a goner.
But the proxy advisers will have a field day examining the corporate governance issues of an entity that will have a 68 per cent shareholder controlling it and a board that has long been criticised as being too closely tied to Stokes and over the years allowing him to sell private assets into the listed Seven entity, without a clear picture of who is the main beneficiary of the deal.
Some institutional investors have steered clear of the stock for this very reason.
While the company has commissioned an independent experts' report, which is yet to be released, there is some cynicism about its conclusions.
As one investor said: ''Tell me how many independent experts' reports don't conclude a deal is fair and reasonable.''
There are also questions over what would happen to WesTrac's valuation if it lost the main asset, the sole authorised dealership of Caterpillar in WA, NSW, ACT and the north-east region of China.
Seven's share price fell yesterday as investors digested the implications of the proposal, along with its interim results and news that a tax liability had blown out from $400 million to more than $600 million.
There is no denying that Seven needed to do a deal. It has lots of cash, $1.1 billion to be precise, and if it gave it back to shareholders it would have been stung with big taxes.
But the fact that Seven couldn't find an acquisition at a decent price at a time when asset prices have been falling, beggars belief.
That is the claim of Seven and therefore why the WesTrac proposal looked so attractive.
The proposal to create a conglomerate, mixing media and mining services, is being pushed as a must deal.
Investors will have an upside to the improving advertising market, the China growth story and the mining boom in Australia.
From a strategic perspective, Stokes' right-hand man, the highly intelligent Peter Gammell, will run the new listed empire, which reduces David Leckie's control of the media company. The joint venture partner, private equity group KKR, which owns 53 per cent of Seven Media Group, has been given an exit pass that is less fettered.
From a succession-planning point of view, with a 68 per cent shareholding, the handover to son Ryan Stokes will be far simpler.
Between now and the shareholder vote there will be a lot of twists and turns as details of the proposal unfold. There will be a rotation in shareholders but, at the end of the day, the vote will be based on whether investors want to be part of the Stokes carnival.
