Why Do Investors Hate the Southern Cross Seven West Media Merger? Here are 6 reasons why

Ever since the Southern Cross Seven West Media Merger was announced back on Tuesday (September 30), it has been met with disappointment at best, anger and disgust at worst.

What’s not to like? A pair of media companies are teaming up to give the best chance of survival in a highly competitive industry being disrupted by new upstarts (i.e. YouTube, Netflix, Amazon Prime, Spotify and many more). Being larger, perhaps the pair could bid for lucrative sports rights, particularly the NRL? Moreover one company’s investor is being given a certain return of investment (albeit in shares).

So why the fuss about the tie up between Southern Cross (ASX:SXL) the owner the Triple M and Hit networks as well as Listnr, and Seven West (ASX:SWM) which owns Channel 7 and the West Australian? Turns out there are plenty of good reasons not to like the deal.

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6 Reasons Why Investors Hate the Southern Cross Seven West Media Merger

1. The tie up will likely go ahead without a vote

This is not certain yet. But there was no mention of the fact there would be a vote. And the James Hardie fiasco bought to investors’ minds that companies can get away without shareholder votes on takeovers if they involve shares.

To be specific, companies need shareholder approval to issue a quantity of shares more than 15% of what is already on issue, irrespective of the reason…except when it is a takeover.

Investors led by Gabriel Radzyminski, one of the most prominent activist investors in Australia and 11.3% shareholder in SXL, spoke out against it with Radzyminski declaring it,’ epitomises Peter Lynch’s expression of “diworsification”‘. Some investors did support the deal including Spheria Asset Management and Antony Catalano.

2. Southern Cross management do not appear to care

Radzyminski purported to have spoken with SXL and asked for a vote. Or to be specific, he requested that the board change its constitution to require shareholder approval for such a large placement of shares. CEO of the Australian Shareholders’ Association CEO Rachel Waterhouse publicly spoke out calling for investors to be consulted. It seems so far such pleas have fallen on deaf ears.

3. Seven West is getting less

Typically you’ll see a premium paid in takeover deals. Not the case here as the deal values SXL at 84c and SWM at 13c a share, the latter a slight discount to the last close before the deal was unveiled. SWM shareholders will be in the minority with 49.9%, although they will get 4 of the 7 board seats.

4. SXL will be straddled with a large amount of debt

SXL has a debt to equity ratio of 33% but Seven has 133% and so the merged company will have 84%. On this basis it is good for one of the companies, but not the other.

5. Does SXL really need to do this?

We’d argue no. SXL was in regional television but sold the last of its assets to Seven in July. It fixed its balance sheet, grown earnings and reaped the rewards with its share price doubling in the last year. And there has been speculation that even Nine could buy it given that Nine has similar issues (i.e. extensive competition) but has a war chest of cash after selling its Domain stake and returning only 60% of the proceeds to investors.

6. The deal was likely rushed just to get through the ACCC’s easier merger process

Since October 1, a new regime has been in place for M&A deals. The ACCC having to sign off on deals is still the same as it was prior that deal. But this new regime will likely be harsher and more difficult to surpass, although this won’t be a problem for these companies as they got in ahead of the deadline. The AFR’s Chanticleer speculated that,’ The lack of meaty financial information from either Southern Cross or Seven West on Tuesday makes it look like the deal either came together late or was rushed out ahead of the deadline’.

Conclusion

Ultimately, with Kerry Stokes holding 40% of Seven shares and certain other investors like Spheria Asset Management and Antony Catalano backing the deal, it seems this deal going through will be a question of when and not if. We would highly doubt the ACCC would block this deal, at least not on the basis it’d lessen competition because the media space is highly competitive.

But maybe this could be the catalyst for changes preventing companies disappearing without consent of their shareholders.