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2 April, 2020

Seven West Media: Where To From Here?

Seven was in a world of strife prior to the coronavirus pandemic, with things looking even less positive for the broadcaster as it announced staff pay cuts to help combat the economic burden of COVID-19.

In an email to all staff seen by B&T, Seven chief executive and managing director James Warburton warned its employees of 20 per cent pay cuts while also flagging job losses were “inevitable”.

Warburton said the broadcaster has found itself in an “extraordinary and challenging situation” and needed to make business and operations changes accordingly.

Under the changes, Warburton said that all network staff earning between $80,000 and $200,000 and not covered by an enterprise agreement will start a four-day week with a 20 per cent salary reduction.

Employees earning more than $200,000, meanwhile, will be asked to accept a 20 per cent salary reduction and to continue working five days a week to “assist the company through this challenging time”.

The measures taken do not include any Job Keeper Package benefits, which are yet to pass through legislation. However, Warburton said once this package is legislated, Seven “will seek to determine the company’s eligibility” and if it qualifies, will keep staff informed.

Warburton said despite the cost-cutting measures, “due to the significant impact on the business […] job losses will be inevitable.”

He added changes will be “kept under constant review” and “may need to be extended”.

“I’m sure you will appreciate that, while the situation is not ideal, we all need to work together over the next few months to ensure our business remains viable,” he said.

Where to from here?

There’s no denying everyone is struggling. It is probably only a matter of time before Nine and 10 announce similar cost-cutting measures. Yet unfortunately for Seven, the coronavirus pandemic has hit the media company hard.

It has lost the Olympics (for now). It’s lost the AFL. Its shares are at the lowest they’ve ever been.

Yet even before COVID-19 hit, Seven was not in a good place, replacing its then-CEO Tim Worner for “Mr Fix It” James Warburton.

Many believed that Warburton’s appointment spelled a potential sale for Seven. It would make sense, considering his history of doing just that.

In June 2018, Warburton sold APN to JCDecaux for $1.12 billion; a major shakeup for outdoor advertising in Australia.

However, at Seven’s October upfronts last year, Warburton told B&T he had “absolutely no intention” of selling the network.

Yet even analysts are unconvinced the possibility of a sale is off the table, with JP Morgan analyst Eric Pan saying in a note in November last year that the firm believed Warburton was brought onboard to “transform the company either through a sale of the company or significant acquisitions that will change the revenue composition of the company”.

He said at the time: “We believe the likelihood of a sale of the company is higher than acquisitions that are significant enough to transform the revenue composition of the company due to balance sheet constraints.”

Recent deals like the sale of Pacific Magazines to Bauer and a merger with Prime Media haven’t helped quash the rumours that Stokes and Warburton are attempting to improve the company’s balance sheet in preparation for a sale or merger, even if that deal is currently on the rocks.

A possible sale or merger ahead?

Following Seven’s less than ideal half-yearly results released in February and a new low in the share price, talk of a Seven merger appeared to back on the cards.

There have long been murmurings that News Corp and Seven could enter into some form of agreement, however, that rumour potentially came following Nine’s acquisition of Fairfax.

Speaking to The Australian in February, Seven Holdings chief executive Ryan Stokes said consolidation was Seven’s best route out of its troubles, suggesting he’d agreed he would fund the expansion if the opportunity arose.

“I think consolidation is a logical step for the industry and I think that’s going to enable a better leverage of assets through the audience we have and others.

“We don’t see the business currently requiring funds but should a situation occur with a good opportunity we’d definitely consider it.

“That’s where we see a logical opportunity. It’s a situation we’ve seen for a while but it’s a matter of how that’s executed. But we certainly see potential for something to occur,” he added.

However, he denied that Seven was for sale.

When asked by The SMH if the network was on the market, Stokes said: “We see opportunity with media […] I certainly believe in the value of how you can optimise a large-audience business that free-to-air is.”

Ratings wise, the 2020 season of MKR struggled against Nine’s MAFS and 10’s Survivor. What Seven did have on the cards was the AFL and Olympics, yet with both those postponed due to the coronavirus pandemic, well, where to from here for Seven?

Speaking to B&T, industry veteran Steve Allen from Fusion Strategy said Warburton was brought in to largely to reduce Seven’s debt pile, so he’s “flogging as many things that are worthwhile as he can”.

“Seven is a publically listed company and is in the worst balance sheet shape, and Warburton was the main brought in to try and fix it all. And his reprogramming of the network, the other things that he’s tried to do so far have not worked and looking into the future, some of them are still risky.

While Allen said ratings wise April to June doesn’t look too good for Seven, he said House Rules might be a saving grace, but it’s going to be “very competitive”.

He added: “Big Brother will be interesting. We’re certainly a bit doubtful, only because it’s been to all three networks. Tell me a programme that’s been all three networks that’s been a success. There hasn’t been one.”

In good ratings news for Seven, however, its 7NEWS program has consistently topped the metro markets amid the CV-19 pandemic, averaging well over one million each night. Its flagship breakfast program Sunrise is also doing above-average, with its audience numbers fairly consistently beating rival Nine’s Today. Yet while audience numbers are up, revenue is still down.

On Seven’s outlook and revenue share, Allen said CRO Kurt Burnette did well to keep Seven in its number on position, regardless of ratings, up until the end of last year, adding “but now it’s all changed.”

However, Allen said he doesn’t believe Warburton will offer Seven for sale anytime soon, suggesting only “vultures” would come in now, which would be an “unacceptable outcome for the shareholders”.

He said: “Reading into what they’ve publicly said, whilst they’re negotiating with their bankers, imagine if tomorrow’s headlines on the AFR were ‘Seven goes into receivership’. Could you imagine the damage that would do to the banking industry that’s now just getting on the front foot?

“I can’t see any of their lenders pulling the pin and I can’t see a creditor in this environment we’re in wanting to take them off.

Allen said the truism that “we’re all in this together right now” will keep Seven and its banking syndicate “fine”.

He added: “What Warburton will be doing with these finance people is outlining how much they might need in the short to mid term that being six to 12 months, and then how they will pay that back.”

Consolidating its debt pile

The network is currently sitting with $859 million in debt, with its lowest share price ever.

From a high of $15 leading up to the GFC in 2007, to the current price of $0.077c. That is a 99 per cent crash.

The company now only has a market value of $115 million to support its near $1 billion debt.

Some industry insiders suggest it is possible that SWM will receive a takeover bid, but it is unlikely in this current climate.

The company was in talks to sell its production unit to ITV, with some suggesting ITV could end up buying the whole company. Another possibility would be Comcast/NBC, yet it all depends on the duration of the current pandemic and subsequent economic fallout.

Its sales of Pacs Mags to Bauer would have provided the network with a cool $40 million, but it’s currently unclear where that deal stands, with Bauer CEO Brendon Hill refusing to respond to the media’s request for comment on the state of the sale.

And with a postponed Olympics, the good news is Seven will recoup part of AUS$200m it paid for the broadcast rights. It will, however, miss out on advertising revenue.

Seven is also reviewing the Seven West Ventures portfolio, which includes investments in lender SocietyOne, GP booking platform Health Engine and online job marketplace Airtasker.

And last month, it was reported Seven attempted to sell the broadcasting rights of the Big Bash League to 10 in an effort to reduce its significant debt. Seven also failed in its attempts to snare regional broadcaster Prime Media in December 2019.

What does the future hold for Seven? It’s currently clear as mud, and how Seven fares over the next six to 12 months will be crucial.

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