Kerry Stokes will retain control through the equity raising. Photo: Alex Ellinghausen / FairfaxStrong support for Seven West Media raising

If Kerry Stokes wants a seat at the table when the Australian media industry is ultimately freed from rules restricting ownership, he needs capital to get in the game.

Thus the deal Seven Group Holdings and Seven West Media announced on Wednesday is aimed at giving the latter much-needed resources and optionality. How much depends on whether shareholders want to pump more money into traditional media assets whose prospects for growth are not particularly rosy right now.

Depending on how much money Seven West Media raises through the capital restructuring it announced on Wednesday  – from $150 to and $612 million – it would become a more attractive takeover target or at the very least, have enough spare change to buy an asset that is thrown up in future.

There were reports in the media that investment bank UBS had sounded out Telstra as a possible buyer of Seven. For its part, Seven said UBS was operating without a mandate. Maybe. Or maybe it’s a case of plausible deniability.

It can be no co-incidence Seven’s move comes on the heels of arch rival Nine Entertainment’s recently announced sale of its Nine Live division  for $640 million – a move that has left it cashed up and in the game. Even if Nine doesn’t buy anything, it is an attractive target. At the very least it can afford to be more generous with its shareholders – say a buyback or improved dividends.

As with most internal restructurings in the Stokes empire, this one is also fairly complex but its aim is fairly simple and it works for Stokes.

Seven West Media has too much debt and needs to improve the look of its balance sheet – thus it is undertaking an equity issue. Simple enough.

But the deal also involved the Stokes-controlled head company, Seven Group Holdings, converting its preference  shares in Seven West into ordinary shares. This allows Seven Group Holdings to maintain its stake in Seven West without having to put in additional funds.

It won’t need to take up its entitlement in the rights issue in order to retain its 35 per cent stake.

And, depending on how many other non-Stokes-related shareholders take up their offer to invest in the rights issue, Seven Group will  increase its stake either a little or by as much as 10 per cent. Seven Group Holdings won’t, under any circumstances, fall below 35 per cent.

Seven West has an underwriter, UBS, for $150 million worth of stock so at a minimum the Seven West coffers will get a boost of this amount.

If everyone – other than Seven Group – takes up their entitlement there is $612 million up for grabs.

Citi’s Justin Diddams has forecast that after the deal Seven West Media’s net debt will sit at $925 million and 2.3 times EBITDA in current financial year (at underwritten raising $150m) or $470 million and 1.2 times EBITDA (at 100 per cent take up or $615 million raising).

There is a yawning gap between these two scenarios. By Thursday, the market will have a pretty good indication of the appetite for Seven West’s stock because the institutions need to place their orders by Wednesday night.

The offer price of $1.25 per share represents a  discount of 5.6-7.3 per cent to the theoretical ex-rights price (“TERP”) of $1.32-$1.35 depending on the take-up under the pro-rata offer.

This does not represent a particularly large discount and investors could easily baulk at this deal.

This in turn probably explains why UBS is opting to underwrite a relatively small slab of the deal – the amount it feels it can comfortably lay off to sub-underwriters.

Bear in mind that the independent expert assigned to review the deal has deemed it not fair but reasonable, but in the best interests of shareholders.

This is because Seven Group is potentially increasing its holding in Seven West without paying a control premium for any increase in its shareholding. (Seven Group Holdings would counter that it already has control so increasing its stake would not require the payment of a control premium.) Seven Group Holdings is converting its preference shares in Seven West into ordinary shares at $1.28 per share. Non-related minority shareholders need to approve this transaction.

While the equity issue is dilutive and the pricing is not especially generous, the positive element for shareholders is that West’s balance sheet would be strengthened  and its capital structure simplified  by the conversion of Seven Group Holdings’ preference shares to ordinary shares.

According to Seven West chief executive Tim Worner: “The proceeds from the capital raising will strengthen our balance sheet and add financial flexibility to pursue further growth opportunities available to us.”

It certainly makes the game a bit more interesting.

Deal or no deal.

Meanwhile over at Ten, investors had been hoping that the group’s financial results being announced on Thursday would deliver a result to the drawn-out negotiations with would-be suitors.

However, the chat around is that nothing will be announced in this regard.

While it seems that various United States production houses have come and gone with no resolution, the market was pinning its hopes on Foxtel coming up with a price at which it was prepared to spend on taking a 14.9 per cent holding. Follow us on Twitter @BusinessDayLatest media and marketing news and analysis

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