Investors cautious about Kerry Stokes's Seven-WesTrac merger proposal
UPDATE: Lyndal McFarland From: Dow Jones Newswires February 22, 2010 3:20PM
BILLIONAIRE Kerry Stokes unveiled plans today to create a listed holding company for his major assets that will see the merger of media and investment group Seven Network and Mr Stokes's privately-held heavy equipment group WesTrac Holdings.
The deal will see Mr Stokes, through his private investment unit Australian Capital Equity, end up with a 68 per cent stake in the newly merged group, which will be renamed Seven Group Holdings. Mr Stokes currently has a 48 per cent interest in Seven Network.
"Seven and WesTrac Group are two great companies," Mr Stokes said. "Both are performing strongly and both have terrific opportunities for growth," he said.
But Seven shareholders were cautious about the odd combination of media investments and tractors, marking Seven shares down 6.4 per cent at $6.89 by late afternoon, compared with a 1.6 per cent gain in the benchmark S&P/ASX 200 index.
Shareholders will vote on the planned scheme of arrangement proposal in mid-April.
Under the terms of the deal -- which values WesTrac at $2 billion including $1bn of debt -- Mr Stokes' ACE will be issued with 115 million shares in the new Seven Group Holdings, which implies $8.70 per Seven Network share, an 18 per cent premium to Seven Network's closing price on Friday.
The deal will see Seven Network's media platforms, including stakes in the Seven television network, West Australian Newspapers Holdings and Foxtel part-owner Consolidated Media Holdings, combined with WesTrac's Caterpillar tractor dealership chains in Western Australia, New South Wales, the Australian Capital Territory and in North East China.
"We wanted to concentrate our investment and management in one company," Mr Stokes told analysts and reporters. "Our objective will be increasing shareholder value and obviously no one will be as incentivised as much as I am to narrow the discount and to grow the share price and dividends," he said.
Managers from the two companies conceded there were limited synergies from the merger. They also told investors that WesTrac didn't have fixed term contracts with Caterpillar to sell equipment through its dealerships but said that its relationship with the group was solid.
Paul Xiradis, head of equities at Sydney-based funds management group Ausbil Dexia, said he was still assessing the proposal and it was too soon to form a view on whether it was a good deal for shareholders.
"It is changing its stripes with this transaction and it will be more of conglomerate but that is not necessarily a bad thing," Mr Xiradis said, noting if the transaction goes ahead, the listed group will have diverse earnings streams.
"Both businesses are cyclical, so the earnings stream can alter depending on the strength or otherwise of varying driving factors. Media is more exposed to the domestic economy while mining is more an international exposure," Mr Xiradis said.
Peter Gammell, a current director of Seven Network and managing director of Mr Stokes' ACE, will become chief executive of Seven Group.
The proposal comes after Seven Network, which had cash of $1.04bn at the end of December, failed to find value-enhancing opportunities in the Australian media and telecommunications sector, three years after agreeing to sell half of its media operations to private equity group Kohlberg Kravis Roberts & Co.
Still, executives said they would continue to watch for acquisitions, including in the media sector, and Mr Gammell said the group may look to boost its stake in James Packer's Consolidated Media after a year-long standstill agreement expires, depending on price.
Executives projected that Seven Group Holdings will record a net profit of $187 million in the year to June 30, 2011, off revenue of $2.8bn.
The executives also anticipate earnings per share accretion of 20 per cent in 2011, and flagged increased dividends. They said pro-forma dividends are expected to increase to 36 cents in 2011, compared with a forecast of 34c for Seven Network as a standalone unit.
Under the plan, Seven Network shareholders will receive one share in the new Seven Group Holdings for each share currently held.
Seven Network said an independent expert, Deloitte Corporate Finance, has concluded that the plan is fair and reasonable and in the best interests of Seven Network's ordinary shareholders.
Angus Gluskie, portfolio manager at White Funds Management, said that at first glance, the deal was "interesting".
"It will totally transform the company, given it takes it into a very different industry but WesTrac has been a good business, it has got some interesting exposures and it's going to make the new Seven Group a very interesting creature for investment markets," Mr Gluskie said.
"The fact that this isn't a sell-down move from Stokes at this stage indicates he's pretty confident about the outlook for upcoming years," Mr Gluskie said.
Earlier today, Seven Network recorded a first-half net profit of $509.1m, boosted by $468.3m in significant items. That compares with an interim net profit of $20m a year ago.
The Sydney-based company said revenue for the six months ended December 26 fell to $43.8m from $73.2m and the group plans to pay an interim dividend of 17c a share, unchanged on year. Profit, excluding significant items fell to $41m from $77m a year ago.
Source: www.theaustralian.com.au