CanWest floats on shaky profit record

By Shoeshine

Friday 16th July 2004

The cautious pricing of the CanWest MediaWorks float is another sign of a jittery market but it would be easy to read too much into it.

To the seller, CanWest Global, the difference between $1.53 the final price, set following an institutional bookbuild process and the $1.65 top end of the indicative range is $8.2 million, a piffling amount to a firm that had term debt at the end of February of $3.34 billion.

What's more, CanWest Global is keeping 70% and it needs a good share price performance post-float to keep its stake looking attractive.

The Canadians have undertaken not to sell any more shares for a year after listing, unless there's a takeover offer for the whole of MediaWorks.

There's not a lot of chance of that. If anyone was interested they would have been flushed out by the publicity surrounding the float.

In the longer term the Canadian company's aims are uncertain but it is probably aiming for a complete withdrawal.

It's tried to get out before. In 2001 CanWest Global talked to its part-owned Australian subsidiary Ten Network about buying MediaWorks, and in 2002 it abandoned a search for a buyer for the "non-core" New Zealand assets.

At $1.53, the 227 million shares that will be on issue give MediaWorks a modest market capitalisation of nearly $350 million.

It might be argued that, if the Canadians wanted out entirely, they could easily have made a clean exit through the float if the price was right.

But the share float "window of opportunity" has been closing fast.

The conventional wisdom is that CanWest Global sees more upside in MediaWorks but needed cash in a hurry to pay down heavy debts at home. That may have been true a while ago but the company is no longer that desperate.

Over the three years to June it sold $C175 million of non-core assets. On June 17 it announced it had refinanced its senior debt. The banks were sufficiently comfortable by then to relax the debt covenants.

Since then it has raised $170 million selling out of Ulster TV.

The partial MediaWorks selldown has freed up $304 million in share sales and the replacement of CanWest Global's own loans to MediaWorks by bank debt.

With Fireworks, the bleeding production and distribution arm, now shut down CanWest Global's banks are likely to be a lot happier.

As MediaWorks will have shareholders' funds of about $334 million and term debt of $200 million, its new banker, Westpac, should be comfortable too.

But equity investors should spare a thought for the company's history before committing their money.

Shoeshine wonders if any of the Westpac guys who spent years working through the bank's last involvement with the assets are still around. Investors with long memories will remember TV3 floated in October 1989 and went bust just six months later.

Westpac put in Keith Smith as receiver. In the end, trading was turned around and the channel was sold in three chunks to CanWest Global.

The Canadians secured 100% in 1997, by which time the channel was strongly profitable at the ebitda (earnings before interest, tax, depreciation, and amortisation) level.

That same year it brought radio station More FM into the group. Listed company RadioWorks was added in 2000, by which time television profits were slumping again.

In the "Asian crisis" years of 1999 to 2002, MediaWorks clocked up bottom-line losses of $51.5 million.

The radio operations were fine; the problem was TV, where a lurch into the red by TV3 was compounded by continued heavy ebitda losses from fourth channel TV4, launched in 1997.

The man appointed to fix this up was Brent Impey, who had the advantage of arriving as the economic tide started rising.

Revenue for TVWorks, the television arm, rose 4.6% in 2002 and 11.7% in 2003, the first year in which the television side of the business made money $13.2 million at the ebitda level.

The prospectus forecasts assume the revenue growth rate will slow again, to 5.1% this year and 3.5% in 2005.

But strong ebitda growth at TV3 and the staunching of losses at the renamed C4 following its conversion to a music channel are forecast to yield ebitda of $60 million for the August 2004 year and $61.1 million for 2005.

As that has grown from $6 million in 2001 (when the company reported a $17.8 million bottom-line loss) you could be forgiven for thinking the group is now firmly out of the woods.

But for MediaWorks there has always been a long way to travel between the ebitda line and the bottom line.

In 2005, despite an abundance of ebitda, the forecast is for net earnings of just $6.9 million.

The largest of the big ticket items in between is interest of $14.7 million on the loans Westpac is providing to replace the interest-free CanWest Global quasi-debt.

The group has worked through its tax losses and is expecting to pay tax at the full rate next year.

In the non-cash section, goodwill amortisation takes a further $14.6 million.

It should be noted that when the company moves to international accounting standards, maybe in 2006, this item will drop out and goodwill will be valued subject to a biannual "impairment test." Failing the test could result in one-off losses.

Depreciation and the amortisation of broadcast licences take a further $13.4 million between them.

The point here is that, in short, MediaWorks' profits have a nasty habit of disappearing on the slightest puff of economic ill wind.

Even though goodwill amortisation will drop out soon, bottom line profitability, and therefore the ability to pay dividends, will remain vulnerable to even quite modest falls in advertising revenue. And even CanWest Global concedes ad revenue growth is slowing.

So the shares might be pitched as "cheap" but Shoeshine reckons stags should tread warily. They could look cheaper still in a year's time.

Comments from our readers

No comments yet