ARN Media demands exclusive due diligence for Southern Cross Media Group: sources

KIIS FM radio stars Kyle Sandilands and Jackie O.

KIIS FM and Gold radio network owner ARN Media is understood to be demanding due diligence for Southern Cross Media Group on an exclusive basis in exchange for the target gaining access to its own sensitive financial information.

The demand is said to be one of the factors holding up Southern Cross, advised by UBS, either recommending or rejecting the cash and scrip bid on the table from its competitor ARN Media together with Anchorage Capital Partners.

The Jefferies-advised ARN Media and ACP have offered about $239m for the regional radio and television broadcaster Southern Cross, based on the latest share price movement, in what is a highly complex deal that involves the swapping around of assets between ARN Media and ACP to appease regulators.

That was announced on 18 October and the understanding is that before the Southern Cross board gave a view of the deal, it wanted to gain access to the ARN Media books since the transaction involvement part payment with ARN Media’s scrip.

The mooted transaction involved ARN Media offering 0.753 shares and ACP offering 29.6c per share cash for Southern Cross, which owns the Triple M and Hit radio stations.

After the proposal, Seven West Media, which announced the departure of chief executive James Warburton on Thursday and promotion of Jeff Howard to the top job, raided ARN Media and amassed a 19.9 per cent holding.

Australian Community Media owner Antony Catalano also put forward a merger proposal for Southern Cross that was rejected.

Keybridge Capital, of which Mr Catalano is a director, won a Takeovers Panel application over a technical breach of the Corporations Act surrounding a sale of shares by Allan Gray to ARN ahead of the bid, which ARN Media is now appealing against.

If it is unsuccessful, it could force ARN Media to reduce its holding by 6.83 per cent, but ARN Media could then buy shares again on the direct market to lift its stake back to its earlier size.

Southern Cross describes the ARN Media offer as complex and would see it own a third of a combined media entity.

ARN Media has paid top dollar for some of the most highly rated talent in radio broadcasting with Sydney breakfast duo Kyle Sandilands and Jackie ‘‘O’’ Henderson recently renewing a contract with the broadcaster for ten years, said to be worth more than $200m.

ARN Media made the Southern Cross Media bid after amassing a 14.8 per cent stake mid year at $1.08 per share when shares were 72c, and it was worth 91c a share or 5.5 times EBITDA.

Shares in ARN Media on Thursday closed at 93c, up 1.09 per cent, and Southern Cross Media Group shares closed down 6.5 per cent to 94c.

Anchorage is in the mix to take assets that ARN Media would need to offload to appease media regulators that forbid a broadcaster having more than two licences in one market.

Anchorage would have eight metro radio stations, 35 regional stations and the Southern Cross Media television business.

Should the deal proceed, ARN Media would gain the TripleM metropolitan radio network and cede three Gold stations to Anchorage.

ARN Media would acquire 51 stations and send 10 in the other direction, bringing it to a total of 88 stations.

Canaccord believes the deal could add nearly $30m in earnings before interest, tax, depreciation and amortisation for its $165m investment or more with a restructuring of costs and shedding of lease liabilities.

Shareholders have hopes a merger will take the digital audio venture LiSTNR of Southern Cross and iHeart Radio of ARN Media from loss making to a break-even position and the approach sees ARN capitalise on Southern Cross’s $15m to $20m spend on its platform.

Analysts at Canaccord earlier said ARN’s proposal would remake the company as one that is larger, more profitable and with a better growth outlook.

Institutional investor Allan Gray, a large shareholder in both stocks, is believed to be of the view that a tie up between the pair makes the most strategic sense.