Nine Entertainment, Southern Cross Austereo in merger talks

Nine and Southern Cross Austereo have held negotiations towards a merger that bypasses media ownership laws.

Breakfast hosts Rove McManus and Sam Frost of 2DayFM, part of the Southern Cross Austereo stable.

Nine Entertainment Company and Southern Cross Austereo have held direct negotiations ­towards a $2.2 billion merger that does not require changes to media ownership laws.

It is understood the talks began some weeks ago, with company representatives undertaking top-line due diligence towards a possible deal.

Nine Entertainment this morning confirms it has had talks with Southern Cross Media on “various commercial-broader business transactions” in the past few years, but in a statement said it has not reached agreement on any transaction.

In a separate statement Southern Cross noted its board and management have been reviewing the regional television and radio operator’s strategic options, however it has not received or made any merger proposals.

It is believed Nine (NEC) and Southern Cross consider a transaction could be structured that does not breach media laws.

Although a full merger would breach the population reach rule by taking Nine’s licence area to more than 75 per cent of Australia, advisers believe the deal could unfold as a two-step acquisition.

Nine would buy Southern Cross’s coveted metropolitan radio assets and park its remaining regional assets in a holding entity until the Turnbull government changed the law.

A proposal by Communications Minister Mitch Fifield to retire the reach rule will be put to Cabinet within weeks.

The merger talks are believed to have commenced between the parties before the departure of Nine chief executive David Gyngell from the helm of the broadcaster. Mr Gyngell has this week been replaced by former Nine non-executive director Hugh Marks, a television producer and former network executive.

Southern Cross is led by former Ten chief executive Grant Blackley, who joined in June.

Parties to the talks were believed to have been concerned that Mr Gyngell would not be at the company to run any combined Nine-Southern Cross enterprise, but this is not considered a major blockage to any deal.

Sources close to the negotiations, however, said disparate views on value of the respective companies and their future earnings prospects were the biggest barriers to any transaction being signed.

“This is a 50-50 chance,” a party to the deal told The Australian.

Any deal would almost be a merger of equals, with Nine worth $1.37bn and Southern Cross $849 million.

Nine runs Australia’s leading free-to-air broadcaster, the Nine Network, which is expected to dominate key demographic segments this year, although it is likely to run second overall to Seven. Nine also controls a range of ­digital assets under the Mi9 banner (the expanded ninemsn) and has a range of venture capital ­investments. Southern Cross is Ten’s regional affiliate free-to-air broadcaster.

A sale of the Southern Cross radio business, whose assets include 2DayFM, Triple M and the Hit Network, to Nine could enable Southern Cross to pay down a pressing $669.2m debt pile and use its earnings for dividends.

A disappointing radio ratings survey for 2DayFM this week has injected added urgency to talks, raising the spectre of Southern Cross being unable to service its debt repayments if revenues continue to slide amid lower audiences and advertising revenues.

Meetings and high-level talks have been held sporadically since the two companies abandoned a secret $4bn merger in early 2013.

That deal collapsed when the Gillard government abandoned plans to relax media ownership and concentration laws including reach.

Since then Nine has shaped as a prime acquisition target for private equity firms and media players looking to gain scale in a fragmenting marketplace. Its two US hedge fund owners are not seen as long-term holders. Any deal would require sig­nificant shifts in respective views on how much each company is worth.

It is believed Southern Cross has a bullish view on the prospects of its radio business, while Nine is less positive. SCA is believed to be less bullish on TV than Nine.

Recent days have seen the Southern Cross share price run from 89c to a close yesterday of $1.10, which has also moved the parties apart. Nine closed at $1.55.

For Nine, any deal with Southern Cross would represent the ­latest change of ownership in a rollercoaster period since the Packer family sold out of the once mighty media empire in 2006.

Nine’s former private equity owner, CVC Asia Pacific, loaded the business up with $3.5bn in debt after purchasing it from gaming mogul James Packer at the top of the market in 2006.

Two years ago, Nine was unable to meet its debt obligations, opening the door for Apollo ­Global Management and Oaktree Capital to take control of the free-to-air network in a debt-for-equity swap.

Nine is being advised by UBS’s Matthew Grounds and Michael Stock, while Southern Cross has a long-term relationship with Luminis Partners.

A Nine Entertainment spokeswoman would not comment last night, while Southern Cross Media refused to comment.

News of the fresh talks follows speculation in the market on ­Wednesday that Bermuda-based billionaire Bruce Gordon was attempting to buy a 15 per cent stake in Southern Cross, whose largest shareholder is Macquarie.

Mr Gordon already has 14.95 per cent of Nine and Ten.