Michael Pascoe: Seven West Media has even bigger problems than Bruce Lehrmann

Kerry Stokes' problems with Seven West Media are many and varied, writes Michael Pascoe.

Kerry Stokes' problems with Seven West Media are many and varied, writes Michael Pascoe. Photo: TND/AAP

It may seem unlikely given the attention it’s received this week but Channel Seven has much bigger problems than the reputational damage resulting from its Lehrmann/Spotlight dirty linen being hung out in the Federal Court.

The Kerry Stokes-controlled Seven West Media (SWM) is a company that largely exists on the basis of its intangible assets – its “goodwill” and the value put on its broadcast licences, if anyone would want to buy them.

The stock market has long decided SWM is a dog. Its market capitalisation of $285 million on Friday’s close is less than half what it was a year ago, a shadow of the days when it was measured in billions.

The general view is that SWM isn’t really about the usual listed company things of growing profits and paying dividends. It’s as much about the traditional power media ownership is supposed to endow its controlling mogul, as Crikey detailed while reporting the halving of SWM’s interim profit.

Why ‘strategic’?

Stokes’ 40 per cent stake in SWM is mainly held through Seven Group Holdings which has to go through the sorry task of regularly writing down the value of an investment it claims to hold for “strategic purposes”.

“Why ‘strategic’?” asked Crikey’s Glenn Dyer and Bernard Keane.

“Seven is one of three weakly performing free-to-air linear TV networks with little commercial future. But it can still aggregate lots of eyeballs for its reliably pro-Coalition news and current affairs, and it remains part of the news ecosystem, which gives it political influence. The real power is in Perth, where SWM controls The West Australian as well.

“That paper functions as the in-house newsletter and chief enforcer of the mining and fossil fuel lobby that controls that state and its government-for-hire, currently managed by WA Labor.”

Or, as the SWM chief executive put it less colourfully in the annual report: “The West is an outstanding business, dominating its market like no other news brand in Australia with the most read print and digital products in the state.”

Channel 7 also dominates WA television watching.

SWM is profitable, it just doesn’t share any of those profits with shareholders through the usual dividend method. It hasn’t paid one since 2017.

Creeping control

Share buybacks remain part of the furniture – another $7 million worth in the December half despite the profit dive – to offer some support for the faltering share price and coincidentally assisting Kerry Stokes’ steady controlling creep.

Stokes is a fan of using the corporate creep to gain control without having to pay a premium for that control through a takeover bid. After nudging the 20 per cent shareholding level, an entity can purchase another 3 per cent of a company every year. Kerry Stokes passed the 20 per cent level of the then-Seven Network in 1996 and kept creeping.

And SWM keeps extending its reach, acquiring the regional Prime broadcasting group in 2019 and last year grabbing 20 per cent of the ARN radio network.

But while SWM might continue to serve Stokes’ “strategic” purposes, the stock market’s message is bleak. Not helping is the retirement of long-time executive Bruce McWilliam last month and SWM’s chief executive, James Warburton, at the end of this financial year.

The market thinks SWM isn’t worth much more than the company’s net debt of $257 million.

Its net tangible assets are negative 18 cents a share but the company’s latest results claim total net assets of $435 million, thanks to $700 million on the balance sheet for the intangible value of those licences and goodwill.

The carrying value of the licences and goodwill is a fraction of what they were. The company’s latest results show the licences originally cost $2.3 billion. Accumulated amortisation and impairment has reduced the carrying value to $670 million.

Value dives

Somewhere along the line, $1.27 billion was paid for goodwill. It was down to $30 million on December 31. We’re left to speculate how much might be left after this week.

The market’s belief, as indicated by its price/earnings ratio (the ratio of the share price to earnings per share) is that SWM is not going to get any better.

SWM started this year with the third-lowest PE in the ASX S&P 300 – 297th out of 300. Then last month it was kicked out of the 300, its market cap was too small.

Friday was actually a relatively good day for SWM shares – they closed at 19.5 cents, up one from the near-four-year low they had been sitting on. (And the lowest-ever price if ignoring the 2020 COVID collapse.)

At 19.5 cents, the PE ratio was 1.9. The total market PE is around 26, its longer-term average close to 16.

Decline of free-to-air TV

SWM’s biggest problem is the declining value of free-to-air television. The company reports it has the largest share of total TV revenue – 41 per cent – but that total TV market fell 9 per cent in the December half.

In that half, the network recorded the biggest Australian TV audience in two decades thanks to the FIFA Women’s World Cup. Profit still dived.

The free-to-air stations continue to use all their political muscle to prevent streaming services paying more for key sport broadcasts, even claiming they are doing their bit to fight inflation.

They also have the Federal Government working on forcing television manufacturers to ensure prominent display of and easy access for free-to-air channels.

“We call on the government to legislate the prominence framework as soon as possible,” Stokes wrote in the annual report.

But being a media mogul does not solve all problems. The reputational damage of Seven’s sordid Spotlight/Lehrmann saga and the broader Stokes empire’s support for and bankrolling of Ben Roberts-Smith aren’t repaired by free footy.

The long-suffering owners of the other 60 per cent of SWM cannot be happy – if anyone cares.

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