Malcolm Maiden
KERRY Stokes says Seven Network's shareholders will take or leave a proposed merger with his WesTrac Caterpillar franchise after digesting the details, but in this deal, shareholders also need to make a call on Stokes himself, and his succession plans.
The plan is to tip WesTrac into Seven at a value of $1 billion, carrying Stokes from effective but unofficial control with a 48.7 per cent stake to undoubted control with 67.9 per cent, and converting a media investment holding company into a unique hybrid.
Seven would still have its media investments, including 47 per cent of the Seven free-to-air TV network that was privatised in 2006 in league with Wall Street's Kohlberg Kravis Roberts, 23 per cent of West Australian Newspapers and 22 per cent of James Packer's Consolidated Media Holdings.
But it would also own and run WesTrac, which has Caterpillar heavy equipment sales and servicing franchises in Western Australia, New South Wales and northern China, including the Beijing industrial region and Tianjin.
The deal numbers are complicated and not decisive. The $1 billion value placed on WesTrac is, for example, at the top of a valuation range of $883 million to $1034 million produced by the independent expert, Deloitte, and Deloitte also values the merged group less highly than Seven.
Deloitte's calculation that Seven is worth between $7.63 to $9.51, with a midpoint of $8.57, is based on 100 per cent ownership, however: it contains a takeover premium that Stokes will never pay, given he already has control.
The range for Seven plus WesTrac is lower, at $7.09 to $8.57, with a midpoint of $7.83. That is Deloitte's valuation for a minority, non-controlling stake in the merged companies, and Seven forecasts the deal will be 22 per cent earnings accretive in 2010-2001.
Deloitte gives the deal the nod on the basis that there is a 50 per cent overlap between the two valuation ranges, and on the assumption that once it has a company to run, Seven will trade at a lower discount than applies to it while it is an investment holding company and cash box.
The expert report estimates that, after the deal, the merged holding company will trade about 10 to 15 per cent below fundamental value. Seven was trading at a discount of about 30 per cent before the merger plan was revealed on February 19. The market verdict so far is cautiously positive.
Seven was trading at $7.36 immediately ahead of last month's announcement, and its weighted average price over the previous three months was $6.53. Yesterday it was $7.76, down 21¢ on what appeared to be a bit of hedge fund profit-taking, but still ahead.
Seven's shareholders will realise, however, that a judgment about the numbers is not enough. What they really need to do by April 20 when they vote on the deal is decide whether to back Stokes's business judgment and, in a sense, his durability.
The business he wants to inject was built up over two decades. It's well run, highly regarded, and pointed at the fastest-growing economic sector in Australia and the fastest-growing economy in the world, China. But its future is tied up with the Stokes connection being maintained.
Shareholders can dismiss concerns that WesTrac's Caterpillar dealerships are not well run and high-class. BHP Billiton and Leighton are key customers, and while Caterpillar has competitors including Rio Tinto's main supplier Komatsu and Germany's Leibherr group, when companies need giant trucks, bulldozers and graders, Cats are on everybody's shortlist.
Miners also say Westrac's after-sales service is first-rate. The company has its own sites at the big mining centres, and generates significant income from the rapid supply of spare parts and from top-quality rebuilds of engines and transmissions.
Caterpillar is shaded by Hitachi as a supplier of excavators, but can afford to yield that ground given its strength elsewhere: as one mine manager put it yesterday, ''a Cat fleet with Hitachi diggers is probably as good as it gets''.
But the sales and service agreements WesTrac has with Caterpillar in Western Australia, NSW, the ACT and in China are all non-exclusive, and can all be terminated with 90 days' notice, with or without cause.
Caterpillar also demands that Stokes be involved. There can be no changes of control of WesTrac without its consent, and the original contracts also require that Kerry Stokes remains ''in the active management of, or to continue to own a substantial interest in, WesTrac group''.
Caterpillar has agreed to WesTrac's acquisition by Seven. But it has also extracted an agreement that Stokes will maintain a stake of at least 60 per cent in the merged group.
There's no immediate problem. Stokes is cementing his control of Seven, not distancing himself, and his son Ryan is rising behind him. Two of Stokes's long-time lieutenants, WesTrac chief executive Jim Walker and the proposed new boss of the merged group, Peter Gammell, are also known to Caterpillar. Shareholders will need to be confident that this will continue, however: locking Gammell and Walker into formal contracts that the documents reveal have not existed to date would be a start.
mmaiden@theage.com.au
