Media decline leaves franking credits stranded

Buried in the documents for Seven West Media’s (SWM) all-paper $64-million takeover offer for its regional affiliate, Prime Media Group, is an alarming demonstration of how bleak the future is for commercial television — especially in regional areas.

Seven is offering 0.4582% of one of its shares — currently 37 cents, close to its all time low of 35 cents — for each Prime share. That values the Prime shares at 17.4 cents and the company at around $64 million. Seven West shares have lost more than 20% since the takeover documents were released on November 15 as investors have had the chance to digest the gloomy message the takeover documents contain.

Prime has one major asset other than its television broadcast licences in regional markets: $65.5 million in franking credits (more than the value of the Seven takeover), which have been accumulated by Prime Media earning profits and paying company tax in previous years. But the documentation for the Seven takeover contains an independent expert’s report from Sydney-based Lonergan Edwards & Associates which reveals that Prime’s financial position is so weak that it doesn’t have enough money to pay out the $65.5 million in franking credits to shareholders ahead of Seven completing its takeover.

Prime last paid a dividend in August 2017 when it distributed 3.4 cents a share. Since then it has been battling falling audiences, falling revenue and weak profits, and has concentrated on cutting costs and paying off debt. The drought, of course, won’t have helped in regional markets. According to Lonergan Edwards & Associates, “the ability to distribute these franking credits to shareholders depends on, inter alia, Prime’s level of retained earnings, future profitability, available cash reserves and borrowing capacity”.

But the report points out that “Prime management have not indicated when it might resume paying dividends … the retained profits reserve of the parent entity was only $17.1 million as at 30 June 2019 … net profit before significant items is expected to decline materially in FY20”.

To use the credits, Prime would need to pay out a special dividend, using the $17.1 million in retained earnings and increasing debt (which it has been working to reduce) and use whatever profits it can eke out for the six months to December — probably no more than $12.5 million. That’s clearly short of the $65.5 million value of the franking credits.

Two big shareholders who will miss out on the credits are Bruce Gordon’s WIN, which controls 19.52%, and regional newspaper group and former Nine subsidiary ACM (through its subsidiary WA Chess Pty Ltd) with 13.89%. ACM is controlled by Antony Catalano and Thorney Investments.

But many of Prime’s 2,742 shareholders (as at June 30) are small holders who have suffered the loss of dividends for the past two years.

They and the other Prime shareholders will pick up an interest in Seven in the share offer — but that may not be a lot of comfort. Seven West Media is in the same position as Prime with falling revenues, weakening profits, intense cost cutting and no dividends for shareholders since 2016-17, when 4 cents a share was paid. Seven has billions of dollars in unused tax losses as well.

And that’s the Australian free-to-air TV industry in a nutshell — shrinking revenues, declining profits, and little to no returns to shareholders. Subscription TV is no better: Foxtel has been bailed out by News Corp to the tune of $700 million in loans.

The government is acutely aware of the dire state of regional media. The Coalition has been fretting about it for 20 years, since the Nationals began complaining about the networking of first regional radio licensees, then regional TV news services in the 1990s. We’re now at the pointy end of a long-term decline, while the Department of Communications furiously consults with the industry about the best options for propping it up.

But at this point the only beneficiary of Prime’s biggest asset is going to be the Australian Tax Office and Josh Frydenberg’s budget bottom line.