Prime told Seven deal ‘not fair’ but merger reasonable

But the regional broadcaster still told by independent expert a merger is in its best interests if no better offer emerges

John Hartigan, chairman of Prime Media Group, said the broadcaster was unlikely to reach scale on its own. Picture Jane Dempster

Seven West Media’s proposed merger with regional broadcaster Prime Media Group has been described as “not fair” but a “reasonable” transaction by an independent expert commissioned to assess the $63m deal.

In a scheme booklet sent to shareholders, Lonergan, Edwards & Associates concluded the deal was in the best interests of Prime shareholders in the absence of a better offer, but said the value of the new Seven shares they stand to receive under the merger was below the stand-alone value of Prime.

Lonergan, Edwards & Associates estimated the book value of the new Seven shares to be in the 18.3c to 20.6c, below the expert’s value of Prime, which was assessed to be in the range of 21c and 24c per share. Shares in Seven on Friday closed at 44c each and Prime closed at 20c each.

“Whilst the value of the scheme consideration provides Prime shareholders with a modest premium above the listed market price of Prime shares immediately before the announcement of the scheme, the premium is significantly below those observed in other change of control transactions,” the report said.

Lonergan, Edwards & Associates also warned Seven West Media had “significantly higher debt levels that Prime”, which could impact on the combined business’s profitability.

However, the expert also said the proposed transaction was reasonable as shareholders would acquire an interest in a “much larger, more diversified business”.

“The merged entity will also have enhanced financial scale which may lead to improved access to equity and debt markets and an improved ability to pursue further growth opportunities,” it said.

The expert said it its analysis that “the exchange ratio. is reasonable and appropriate if considered as a merger/combination of the two businesses rather than a change in control transaction.”

Seven announced the $63 million proposal to acquire Prime in October, a deal which Seven chief executive James Warburton described as a “game-changer”.

The proposed merger could allow for cost synergies of at least $11 million on an annualised basis, excluding one off transaction and integration costs. These synergies will come from removing duplicated procurement and business operations, consolidating corporate and support functions and consolidation of head office and overlapping premises.

A letter from Prime chairman John Hartigan said Prime was unlikely to reach scale on its own and that there were few, if any, acquisitions that could improve Prime’s financial outlook. Other concerns outlined included the likely increase of Prime’s affiliation fees in the absence of the merger, which would reduce its profitability, and the competition Prime’s faces from global streaming services and online platforms for free to air broadcasters including Nine, Seven and Ten.

“The Prime Board has not identified strategies, within its control, that would reverse the pressure on viewership with the result that advertising revenues may continue to decline,” Mr Hartigan said.

Regional newspaper investors Antony Catalano and Alex Waislitz have been slowly increasing their stake in Prime which could act a spoiler if they bank with other key shareholders. As of November 14, the pair jointly had 12.89 per cent of all Prime shares held in their vehicle

WA Chess Investments. WIN TV owner Bruce Gordon owns 11.59 per cent of share while Spheria Asset Management holds 14.42 per cent.

“While the intentions of WA Chess Investments are unknown at the date of this report, in our view, there is some possibility that WA Chess Investments will put forward an alternative proposal for or in connection with Prime prior to the Scheme Meeting,” the report said.

The Scheme meeting is due to take place on December 19 in Sydney.

Seven and Prime’s merger is subject to ACCC and Australian Communication and Media Authority approval.