The $220 million ‘double-edged sword’ that’s bothering Nine

Nine Entertainment Company is expected to cease its share buyback next month after spending more than $220 million over the past two years as part of its capital management program.

Nine, the owner of this masthead, reports its full-year results at the end of August. Its profits have been hit by a decline in advertising demand amid a weak economy.

Nine Entertainment Company chief executive Mike Sneesby.Credit: Alex Ellinghausen

The fall in advertising revenue, and also the end of a commercial deal with Meta, the owner of Facebook and Instagram, has forced the media company to cut costs, including laying off up to 200 staff across the business.

There have also been substantial staff lay-offs at other media companies such as Seven West and News Corporation.

“You’ve got to keep control of costs in a tough revenue environment,” said MST Marquee media analyst Fraser McLeish. However, he added a buyback was never going to protect Nine’s share price given the deteriorating market conditions in which media companies had operated in the past 12 to 18 months.

“You’ve had a lot of pressure on the advertising market, and TV has been particularly weak, and that has been your main driver for share prices of Nine and Seven West,” he said. “That’s going to massively outweigh any buyback.”

Nine commenced its buyback in September 2022, announcing it would repurchase up to 10 per cent of its stock. At the time, its shares were trading at $2.14. The stock was recently trading at $1.34.

The highest price that Nine has paid to repurchase its own shares is $2.24, and the lowest is $1.35.

A Nine spokesman declined to comment. Nine management have previously said the buyback wasn’t about supporting the share price, but to ensure the company made the best use of its capital in shareholders’ interests. Nine’s chief executive, Mike Sneesby, has previously said the buyback demonstrates the value and strength management see in the company long term.

Dean Paatsch, founder of Ownership Matters, which advises institutional investors, said buybacks were a double-edged sword for companies’ management teams. “You buy back your shares, and something happens, and your share price falls, you look like a fool,” he said. “You buy them back, and your share price rises, you look like a genius.”

Buybacks are typically popular among investors because they lower the number of shares outstanding and thus boost a company’s earnings per share.

“We love buybacks because it shows confidence in the company,” said Oscar Oberg, lead portfolio manager at Wilson Asset Management, which is not a Nine shareholder. “A buyback essentially reduces your shares on issue, which means your earnings per share increase.

“Theoretically, your share price should increase, but it all depends on what valuation the market is willing to put on that company. Management teams and boards are incentivised for the earnings per share to grow, and ultimately, the share price.”

A buyback also increases the existing shareholders’ ownership of a company. Nine has a substantial investor in the family of media mogul Bruce Gordon. His private investment group, Birketu, has a 14.95 per cent stake in the company, and indirectly has a further 10.15 per cent in cash-settled equity swaps held by Macquarie, giving it an overall stake of 25 per cent.

Nine’s board has yet to determine if it will extend the buyback for a third year beyond its expiry next month.

Not everyone agrees that buybacks are an efficient use of a company’s capital. Christine Brown, emeritus professor at Monash University’s business school, said a view, particularly among economists, was that rather than undertaking buybacks, management teams should be investing in their companies, in projects and employees to grow and add value in ways that benefit not only the organisation, but the broader economy.

Bruce Gordon’s private investment company, Birketu, is the largest shareholder in Nine.

Nine has invested $305 million in securing the Olympic broadcast rights until, and including, the games in Brisbane in 2032.

Buybacks also spark debate about which shareholders benefit most – the ones who sell into the share repurchase scheme, or the ones who remain. “Long-run studies in the US show that companies that do buybacks in the long term underperform,” said Brown, who has done extensive research on buybacks.

While buybacks are a legitimate capital management tool, there is often a perception that they are undertaken by companies when they “run out of ideas for investment opportunities”, said Brown.

Goldman Sachs has forecast that Nine will report full-year earnings before interest tax and depreciation of $509 million, compared with $591 million the previous year. It has a “buy” recommendation on the stock with a share price target of $1.90.

Goldman’s media analyst Kane Hannan wrote in a report that despite the uncertain global economic outlook, Nine was well positioned to offset the decline in the advertising market “with its high-quality suite of digital assets”, “strong cost performance”, and attractive valuation given the recent share price weakness.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.