Southern Cross plots revival as new boss takes the helm

ASX-listed media heavyweight Southern Cross Austereo enters a new phase this week as chief operating officer John Kelly takes the reins as CEO, with investors hoping for a lift after a torrid couple of years for the company.

Kelly is a long-time colleague of outgoing boss Grant Blackley and widely seen as a continuity choice, after SCA’s year-long external search for a successor failed to land a suitable target.

The $255 million radio and regional television company has been stuck in a rut for the past couple of years, with profits and revenue edging downwards. Analysts say the incoming Kelly will have plenty on his plate to work through.

Apart from anaemic advertising conditions for television and radio, there’s the added intrigue of rival ARN Media landing on SCA’s register, picking up a 14.8 per cent stake in the business last week.

Incoming CEO and managing director John KellyCredit:

The one thing in Kelly’s favour, say analysts, is SCA’s portfolio of assets, which includes one of Australia’s top digital audio platforms. It still leads the pack in radio advertising revenue share and is about to announce an extension to its regional television affiliate deal with Network Ten.

The pair signed a last-minute two-year deal in 2021 to broadcast shows such as Survivor and MasterChef on Southern Cross’ regional assets around the country after Nine switched to WIN, in a move that ultimately cost SCA millions. The company and Ten declined to comment on the imminent extension.

SCA launched its own digital audio platform, LiSTNR, in 2021. It is yet to turn a profit, but Morningstar analyst Brian Han said staying the course with the platform is crucial for SCA.

LiSTNR accounted for only $10.5 million of the total $200.4 million in audio revenue recorded by Southern Cross in the first half of FY2023, with EBITDA relating to the investment at a loss of $9.3 million. And Han said that despite the upfront costs, the investment in LiSTNR should pay off.

“They are investing for the future,” Han said. “Some people are just impatient.”

Adrian Roeling, chief operating officer at advertising media agency Hatched, said scaling its digital audience and putting the data to good use were key to SCA’s digital transformation strategy.

Given Kelly’s experience, Roeling said he expects a push to secure rights to high-demand content and distribution agreements to continue LiSTNR’s drive for signed-in users, which was last reported at 1.2 million in February.

“This is the crucial battleground for all media networks as they try and compete with the global players and the scale of their accessible walled gardens.”

LiSNTR topped the sales representative chart in the most recent podcast ranker, finishing behind rival ARN in the publisher rankings, which has built its strategy around an iHeartRadio product.

With radio still making up the majority of its revenue, securing talent will be front-of-mind for Kelly.

Industry executives have argued that the departure of Kyle and Jackie O to ARN-owned KIIS in 2013 was a turning point for the company’s long-term prospects. The first survey for 2DayFM in 2014 without the pair saw the station’s share drop from 10.4 per cent to 3.8 per cent at breakfast. It has never recovered.

While SCA got the expensive duo off its books, they took an estimated $30 million-$50 million in annual advertising revenue with them.

SCA’s 2015 annual report noted it had been a “difficult year”, with its metro radio business advertising revenue falling 11.1 per cent.

“Talent is a hard balance,” Han said. “You need good talent, but there is a tendency to overpay”, and they often under-deliver, he added.

KIISFM’s Kyle Sandilands and Jackie O.Credit: ARN

In the years following the 2Day star pairing’s departure, the network rotated a vast number of talent lineups before pulling its breakfast show entirely in 2019. Almost a year and half later, it returned with Ed Kavalee, Dave Hughes and Erin Molan.

Kyle and Jackie O grabbed a market leading 17.9 per cent share for KIIS in the most recent GfK survey, while Hughsey, Ed and Erin had a 5.3 per cent share.

Since radio suffered at the height of the pandemic, the sector has recovered somewhat, finishing 2022 at $701.4 million in ad revenue across the five metro markets, a rise on both 2020 and 2021. The second half of FY2023 has provided uncertainty, however, according to advertising executives.

Barring Fox FM in Melbourne, audience figures in the nation’s two largest markets remain underwhelming for SCA, yet it maintains a strong share of advertising dollars, about 29 per cent nationally, according to sources privy to the data. ARN, home to Kyle and Jackie O, has increased its position recently, and now sits in second with about 22 per cent, according to sources.

Kelly isn’t the only executive change at the top at SCA. Advertising investment specialist Seb Rennie recently joined the company this year to head up LiSTNR’s commercial offering, before shortly after being appointed chief commercial officer across the entire company, replacing chief sales officer Brian Gallagher, who resigned.

Industry sources said the move suggests strong intentions to push advertising engagement from the market’s biggest spenders.

Should he succeed, Kelly might have some extra ammo to consider a push to return Kyle and Jackie O to the network, who find their contracts up for renewal next year.

In its TV division, which delivers between 20 and 25 per cent of revenue, SCA and Network Ten are expected to announce an extension to their affiliate regional TV deal this week, say sources close to both networks who spoke on the condition of anonymity. The current deal expires this month.

SCA hoped to sell its TV assets in 2022, but a deal did not materialise, with flagging television ad revenues making matters more difficult in the past 12 months.

Han criticised Southern Cross’ disappointing half-year results earlier this year, in particular its television assets, which it now appears to be stuck with despite Blackley previously claiming it is “very comfortable” retaining them. An extension of the deal with Ten buys Kelly some time to consider what to do with its TV interests.

ARN’s surprise entry

The future of Southern Cross and rival media company ARN look to be intertwined for the near future, after the latter raided SCA’s register to pick up a 14.8 per cent stake for $38.3 million, boosting its share price 20 per cent to a three-month high of 92¢ on Tuesday. Sources inside ARN told this masthead that the investment was nothing more than the belief that all stocks in the radio market remain undervalued.

SCA isn’t the only one that believes the radio, and wider media sector, is undervalued, and Han agrees. Yet investors often have no shortage of excuses to sell their media stocks, as a major shareholder in both SCA and ARN, Allan Gray, has been looking to do this past week.

With further consolidation touted in Australia’s media sector, ARN has been heavily rumoured to be looking for a buyer after its acquisition of Grant Broadcasters last year. A tie-up between ARN and SCA would be complex, but not impossible. Any plan would have to get creative with the combined radio assets, as current regulations limit a company to a maximum of two licences per market.

Its unlikely this is ARN’s intention, though their hefty stake makes potential movability more difficult for Southern Cross.

While profits have been in freefall, “the balance sheet is solid” at SCA, Han says. Blackley adopted a company heavily in debt in 2015. What was almost $500 million was last reported at $102.5 million in February, leaving Kelly with options on his plate and optimism from certain corners of the market as to what comes next.

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