There’s Still Hope For Oz Television Webs In Hock

For the long term, the prognosis for commercial television in Australia is good, albeit guarded.

For the short term, the immediate future of the three metropolitan commercial networks is shrouded by the imponderable question of how long the recession will last.

With two webs in receivership, but each having the prospect of a debt-equity swap by the banks, there will certainly be a realignment of the Australian commercial television industry in the next year.

The industry’s growth has always been well ahead of inflation and, depending on how the government stacks the deck, owning a license should be a good bet.

One wild card is what form a new Broadcasting Tribunal takes and what powers it will have. Another is the economy; with unemployment running close to 10%, the retail sector looks distinctly shaky and consumer durables are definitely in danger. There’s no question that the advertisers are treading cautiously, and the market looks soft for a good few months to come.

Yet a VARIETY survey reveals healthy prospects for three viable commercial channels.

Problem parents

“We had three networks operating profitably until two years ago,” says Len Mauger, chairman of the Federation of Australian Commercial Television Stations. “The problem was with the parent companies [becoming insolvent].”

In fiscal 1989-90, the 15 capital city stations posted a 12% growth in ad revenues and a total take of $A1.4 billion ($1.1 billion). By contrast, the 35 independent regional stations logged $369.2 million ($288 million), a growth of 13.2%. The Australian commercial tv industry produced $A1.7 billion in revenue, up 13.4%.

Seven and Ten, the webs in receivership, are, for all intents and purposes, acting as though everything is normal, while Kerry Packer’s Nine is behaving soberly.

After the splurge

In other words, there is financial constraint all around and good, sound economic sense has returned to the management of the stations after the disastrous splurge of the late ’80s.

One of the main effects of the splurge was to drive program prices up to ridiculous levels. At one stage Australia, with a population one-third the size of Britain, was paying three times more for product. The cap on movie purchases has now settled at $A200,000 ($156,000).

The damage was to a great extent self-inflicted. Small wonder that one of the fundamental priorities is to renegotiate those contracts. Returning to sensible and equitable prices will be the keystone of the new economic era for the commercial nets.

The Seven Network is in pretty good shape – considering. When Christopher Skase’s Qintex went to the wall, the banks were left holding debts of $A725 million ($566 million). After selling off assets, including resorts, company yachts and corporately owned antiques (all massively overvalued by Skase for accounting purposes) one viable property remains, the Seven Network, which is priced at $A625 million ($488 million).

According to Ian Holmes, president of the Grundy Organization, which audited the books with a view to buying the web,” By all normal accounting procedures, the network is really worth about $A250 million ($195 million). We were being optimistic when we bid $A500 million ($390 million).”

The banks rejected the offer and are setting up a tiered company to “take and hold” Seven until the economic climate makes it a better prospect.

In fact, the network is now well-managed and pulling down good ratings. In this financial year, earnings before interest and tax look like they are approaching $A35 million ($27 million), according to a senior executive.

Ten owes $355 mil

The Ten web is also in hock to the banks for $A455 million ($355 million), and is also in the hands of the receiver. Earlier this month, the two main banks, Westpac and the Commonwealth, agreed to buy out Citibank’s $A45 million($35 million) plus accrued interest.

With the foreign bank’s interest thus eliminated, the two local lenders are free to set up a new holding company which will avoid any complications with the pending broadcast act, and government policy on foreign control over a tv license.

The network is running third in the ratings, but CEO Gary Rice is confident that a restructuring will occur before the end of the year. If the banks can skirt the legal problems of cross-ownership and avoid the other traps in the current legislation, they will wait until the market is ripe for a network sale.

Rice predicts that the web will break even in terms of cash flow by July, and could well be profitable in the first half of fiscal 1991-92.

Ten’s main problem is inventory. “Twin Peaks” and “The Simpsons” are delivering, but last year’s desperation prompted the programmers to be profligate with its pictures, so the movie shelves are fairly bare. But there must also be a downward adjustment in license fees.

While most suppliers have been highly cooperative given the web’s financial profile, MCA – which has some rights to equity – is evidently playing hardball. “We’re talking,” is all that Rice would say.

Interestingly, one of the most helpful suppliers renegotiating has been Fox, owned by Rupert Murdoch’s News Corp. – which is attempting to renegotiate rights over-bought in the heady days of rivalry between Europe’s Sky Channel and BSB (now merged).

In the catbird seat is cash-rich Kerry Packer, whose reacquisition of the Nine Network from Alan Bond for less than he was still owed on it has now passed into legend.

Nine doing nicely

Nine is leading the ratings and doing very nicely in ad sales despite the soft market. Packer has massively reduced debt (from $A577 million to $A196 million) and cut operating costs. He recently told institutional investors that Nine’s full-year revenue will double to $A560 million ($436 million). This should produce earnings before interest and tax of $A150 million ($170 million), he said, and equates to net earnings of around $A40 million ($31 million).

Despite the 13% revenue gain, the 35 regional independent stations are hurting from both the recession and the cost of the government’s equalization plan, which had the intention of providing people in the country with the same programs as their cousins in the cities. The country audience is being divided into markets and the existing operators are to provide one of the networks’ signals.

Mini-webs bleed red

It has the effect of turning the indies into primary affiliates of the three metro webs. Significantly, the regionals’ program buys added $A89 million ($69.4 million) to the capital city webs’ fiscal 1989-’90 revenue.

As the accounts are made public, there has been a cascade of red ink emanating from the provinces. Most owners are expecting the bleeding to continue for three to five years. One non-metro mini-web, Bruce Gordon’s TWT Holdings, has had to set aside $A24 million ($19 million) for capital expenditure such as new transmitters required to service the wider geographic area. Also, program acquisition prices are now higher.

For most regional operators the first economy to be made will be in local content, and there’s bound to be a consumer fight about that down the pike, just as there was in America decades ago.

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