Ten Times Trouble

Ten Times Trouble

According to today’s Australian Financial Review, the board of Network Ten (ASX: TEN) is considering putting the station into administration after the company announced a material loss in April for the first half of the financial year and after the board failed to garner further financial support from its billionaire shareholders.

The company, it was initially reported, had lost the support of its four billionaire shareholders, Bruce Gordon, Lachlan Murdoch, Gina Rinehart and James Packer – the latter three, it is estimated by the AFR, having lost as much as 90 per cent of their investment.

No fund manager will ever get every investment right but avoiding a loss in Ten has been relatively easy. Indeed we warned investors multiple times not to follow the billionaires into this one.

Back in 2010 James Packer bought into Ten for $1.50 per share (pre the 10:1 consolidation of January 2016). In an interview with Peter Switzer, we questioned James Packer’s purchase price for his investment in Ten and noted that we were baffled by the prices investors were willing to pay for media assets in Australia – especially TEN, which had no cross media sales opportunities or non-TV assets to offer clients.

Valuing TEN then at 66 cents, it appeared Australia’s billionaires had overpaid.  We also explained TEN’s poor economic performance over the previous decade and the very lowest quality rating at the time of C5.

In July 2011 we again warned investors about investing in TEN;

“Warren Buffett observed that we are all “accidents of the womb”. If you will allow me to extend this train of thought to “accidents of business” there must be many successful entrepreneurs in Australia who might wonder how much bigger their empires could have been if they had…established their business in LA, New York or London.

And I suspect this is a question – give or take a few expletives – that must surely vex Lachlan Murdoch in the context of his latest management decisions at Ten Network where he has a maximum audience of just 22,638,747.

The way to think about the market economics of TV is like a giant card game. There are three high roller teams at the table: Lachlan, Gina Rinehart and James Packer at Ten; the private equity outfit CVC at Nine; and Kerry Stokes at Seven.

Each ratings season represents a hand that is dealt and must be played. Sometimes Seven gets a good hand, but next time it will be Ten and then after that it will be Nine. The order doesn’t matter much and the stakes don’t get any bigger (literally!).

The point is that the three teams are sitting in a room with the doors and windows closed, there’s a fixed amount of money in the pot and who wins will simply depend on the strength of their current hand.

It’s a card game without an end. New hands are being dealt constantly. Occasionally one of the players will have a good run, get cocky and overplay his hand by spending too much on programs that flop. Someone else takes up the mantle and round and round we go.

That anyone thinks this is going to dramatically and permanently improve is perhaps the only surprising thing about the television game.

Actually, on second thoughts, I may have been a little optimistic. I did say the amount of money in the pot stays the same. After we take inflation into consideration it definitely is smaller! Then there are the forces of fragmentation at work.

The upshot of all of this is that the share prices of these companies go through periods of favour – almost always at the expense of another – and then periods of rejection. In the long run, the aggregate performance is unlikely to be impressive, nor any improvement be permanent.”

Chanel TEN may yet survive its latest headline grabbing crisis but we believe its economics are unlikely to improve.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.