To release value is just.... - The Age - 11th May 2007
WORDS at the heart of Publishing and Broadcasting Ltd's budget-day announcement of its plan to separate its gaming and media interests into two listed companies suggest it is a valuation issue. That, however, seems to be simply the starting point for James Packer's ambitions.
The logic of splitting PBL is straightforward and indeed is simply an extension of the logic that drove Packer to sell half of PBL Media to CVC Asia Pacific last year, releasing $4.5 billion of cash in the process.
Gaming has increasingly become the focus of Packer's growth plans, with PBL embarking on a frenetic expansion of its activities offshore. It already accounts for 60 per cent of PBL's earnings before interest, tax, depreciation and amortisation, and has far greater growth potential than the more mature core of PBL Media.
The CVC deal, while there was a strong element of opportunism — Packer saw a chance to grab a big lump of capital on terms that, thanks to the frenzy of private equity deals, might never be available again — recognised the looming collision between the ambitions of the two businesses.
It made no sense within the old structure to allocate capital for expansion of PBL Media. Not only was that business low-growth and facing big challenges, but in the wake of the Coonan media law reforms expansion opportunities would be expensive. From PBL's perspective, the case for directing all its discretionary investment into the higher-returning and faster-growing gaming business was compelling.
The CVC deal worked at several levels. It capitalised on the value of the media businesses to a private equity group in the midst of a scramble for cash-generating assets, to create a huge war chest for the expansion of gaming. It also, however, dramatically lowered PBL Media's cost of capital, allowing it seriously to contemplate expansion.
What it didn't do, however, was to break the nexus between gaming and media. Substantial expansion of PBL Media along the lines envisaged by the partners would create the prospect that it would grow relative to the more highly-rated gaming operations and therefore undermine one of the most appealing elements of the transaction.
Substantial growth might also mean PBL was forced to redirect some of the capital it had released back to the media business. Packer wasn't going to dilute PBL's exposure to gaming in order to support PBL Media's growth ambitions.
The formal separation of the two sets of businesses ends the linkage and the conflicts that created for PBL. Moreover, PBL has a messy executive super-structure. Separation allows a clearer allocation of responsibilities and accountabilities.
The demerger will probably see Crown valued more highly than it has been within the present structure but that may not necessarily be at Consolidated Media Holdings' expense.
PBL Media has a raft of new media exposures, as well as Nine Network and PBL's magazines. Within the existing group the interests in Foxtel, Fox Sports, Seek and Ticketek aren't particularly visible. Given that Consolidated Media will own 50 per cent of PBL's old media businesses but fully own its interests in new media, they will get far more attention.
Despite the spate of offshore gambling interests PBL has acquired since the deal with CVC it must have become obvious to Packer that PBL simply had more capital than it could deploy sensibly. It was awash with cash, and that would dampen its performance statistics and value.
Hence, as part of the separation, $2 billion will be returned to shareholders. That will still leave Crown with a near-ungeared balance sheet to fund its growth. The dispersal of the cash sends a clear signal, however: that Packer is not contemplating the much-speculated tilt at Tabcorp or any other large, single target.
Packer himself will extract about $760 million from the restructure. While he apparently plans to use the cash to pay down debt in his privately owned Consolidated Press, it will give him the capacity to support any new capital needs for either of the two demerged entities, in which he will retain a 37 per cent interest. It might also, of course, provide the capital for expansion elsewhere.
With the demerger, Packer will have two separately listed and focused vehicles in different sectors and a foot on a third through his 20 per cent-plus holding in Challenger Financial Services, now a $3 billion company. His privately held hedge fund, Ellerston Capital, is apparently growing rapidly and could, if brought next to Challenger and a range of smaller financial services interests, help create a third pillar for his portfolio.
THE rumours of a BHP Billiton bid for Rio Tinto have subsided almost as quickly as they emerged, with most of the market concluding that a merger is something that perhaps ought to happen rather than something about to happen.
With hindsight, it is obvious that there is no imminent move planned by BHP on Rio or anyone else of substance.
Almost every working day this year BHP has filed a notice disclosing on-market purchases of shares in the British entity with its dual-listed company structure, BHP Billiton plc. There is no way BHP would allow that buyback program to continue while it was planning a major acquisition and, therefore, held extremely market-sensitive information.
The buying is part of a $US10 billion ongoing capital management program, most of it dedicated to acquiring plc shares. Any suspension of that program will, of course, provide an early warning signal that BHP is planning something substantial.
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