Pros and cons in Nine’s takeover of Southern Cross Austereo

A takeover of debt-burdened Southern Cross Austereo by Nine would fail to achieve any significant cost savings.

Austereo offices at World Square in Sydney.

A takeover of debt-burdened Southern Cross Austereo by Nine would fail to achieve any significant cost savings due to the level of investment needed and the volatility of the Australian media market.

But the mooted deal would lift net income in the combined entity to $54 million over the first three years of trading on a pro-forma basis.

Nine has been circling the radio and regional TV group for two years, but can’t strike a deal without the removal of the 75 per cent population reach rule.

Deutsche Bank analyst ­Entcho Raykovski has run the numbers after Nine sold its events business in a $640m deal, putting the company in a “favourable negotiating position, with Nine now able to offer a significant cash component to Southern Cross”.

He said Nine’s track record in recent deals showed the key driver of interest in Southern Cross was potential revenue synergies, rather than reduced costs.

After buying WIN Corporation’s Perth and Adelaide TV stations in a $500m deal two years ago, Nine has invested more money in the assets to compete with a dominant Seven Network.

Mr Raykovski said most of the synergies, which he estimates at between $40m and $45m, would be generated from Southern Cross switching its affiliate agreement from Ten, the third-placed free-to-air network.

In the first year, costs would increase by $10m, with cost savings of just $10m over the second and third year of the deal post completion.

In a recent interview with The Australian, Nine chief executive David Gyngell said he was seriously contemplating his first major acquisition since acquiring the two TV stations from media mogul Bruce Gordon.

Mr Gyngell said the deal had put him in a “pivotal position” to take advantage of historically cheap valuations in the media sector.

Mr Gyngell added that he liked radio’s defensive characteristics, noting it had escaped the downdraft in the media sector brought on by a weak advertising market and the internet’s fragmentation of audiences.

“Everyone has been calling the death of that, but it continues to find growth,” he said.