ARN’s takeover bid for SCA is on the critical list; can it be saved?

BY Tim Burrowes

May 13, 2024 10:19

ARN’s takeover bid for SCA is on the critical list; can it be saved?

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Anchorage got spooked; here’s what ARN needs to do now to make the Southern Cross Austereo takeover happen

The metaphorical cupcakes were already being iced for this morning’s annual general meeting of ARN Media when things fell apart at the end of last week.

Instead of welcoming shareholders to the shiny new ARN offices in North Sydney with news that the company was ready to close the deal, the plan to take over rival Southern Cross Austereo is in tatters. It’s not quite dead, but an awful lot will now need to go right if it is to be saved. We’ll get some strong signals today whether shareholders have the patience for CEO Ciaran Davis and chairman Hamish McLennan to attempt to thread the needle.

Here’s where we’re at:

Plan A: The Anchorage proposal

ARN’s scheme to swoop on Southern Cross Austereo and take its best parts, goes back the best part of year. In June 2023, ARN dropped $38.3m on buying a 14.8% stake in its main rival.

It then took another four months for ARN to makes its move. In October, it launched its takeover bid. Pairing up with private equity house Anchorage Capital Partners, ARN proposed a complicated scheme.

ARN would take control of SCA’s male-focused Triple M Network and run it next to the company’s female-skewing Kiis network, expanded to five metro cities.

Meanwhile, Anchorage would take the dregs – the former ARN Pure Gold network and SCA’s Hit Network. It would also take Southern Cross Austereo’s fading regional TV licences. This new, weaker broadcasting company ACP would then go back to the business of competing with a now stronger ARN.

Meanwhile, ARN and ACP would jointly own a third company which would control both broadcasters’ streaming assets. While media ownership laws stop anyone from owning more than two radio licences per market, there are no such rules around streaming.

The deal would be funded by a mixture of cash from Anchorage and shares in ARN Media.

SCA’s board took a while – critics would say too long – mulling over the offer before rejecting it in March. But it left the door open for an improved offer, which the ARN-ACP consortium duly delivered a few days later. The offer – a larger slice of the strengthened ARN for SCA shareholders – was enough for the board to agree to move into due diligence.

The week it all fell over

And then… radio silence. During the due diligence process, the advertising market continued to deteriorate.

In March, the radio market was down 8%, according to Guideline SMI; TV had it even worse, losing 15%. The owners of regional TV licences – which operate on an affiliation arrangement with the metro networks, where they hand over an agreed percentage of broadcast revenues in exchange for carrying their content – do not even get the upside of a growing streaming market, as those rights are held by the metro companies.

Nonetheless, the work progressed. According to SCA, the consortium confirmed on at least five seperate occasions, including just over a week ago, that they wanted to proceed.

But Anchorage – which was not obliged to go ahead – was getting nervious. According to ARN Media’s update yesterday morning, the major problem for Anchorage was the “deteriorating outlook for regional TV”.

Last week, WIN and Seven West Media pulled the plug on their joint venture in Mildura meaning the market may soon have no Ten signal. Ten also cancelled its The Bachelor and The Masked Singer franchises last week, in a move seen by the market as cost cutting.

It should be noted, mind you, that it helps support the ARN share price to suggest that Anchorage’s doubts were specifically around TV, not audio.

Nonetheless. it’s hard to believe that the tough radio market was not at the very least a factor. The business Anchorage was signing up for last October is weaker now. So – as Unmade predicted at the weekend – Anchorage pulled the plug.

Plan B: ARN goes it alone and SCA rides again

ARN is not yet ready to throw in the towel though. Yesterday it proposed a deal where shareholders swap each SCA share for 0.87 shares in ARN, as per the original plan. But instead of getting cash for their shares, they also retain their ownership in a weakened SCA which would refloat on the ASX once the deal was completed.

The plan for a jointly owned streaming company also changes. Under the new proposal, ARN would own the whole thing.

The initial response from SCA was unenthusiastic, pointing out in its ASX response that it has already invested “considerable expense” on working through the proposal.

The old offer included cash and tax benefits no longer on the table. And the new deal would see SCA shareholders end up with interest in only about a third of the new streaming company via their new ARN shares.

The new deal offers “significant technical, structural and other separation complexities”, says SCA. But the board has not outright recommended that the offer should be rejected – yet.

Plan C: Other scenarios

One reason the SCA board may be keeping options open is the absence of an obviously more palatable option.

With SCA’s low share price – and it lost 9% yesterday on news of the deal’s collapse – the company remains prey for somebody else. That must be frustrating with its streaming service Listnr moving towards profitability,

Now the calculus potentially changes again. Those who were winning the argument that strength came from pure play audio most now factor in other merger activity.

Antony Catalano, proprietor of Australian Community Media local news mastheads, remains a player. Although his previous proposal to merge his mastheads with SCA to create a regional giant was knocked back, he has since increased his holding in SCA to about 8%.

Outdoor company QMS, privately owned by Quadrant private equity, must surely come back in the frame at some point too.

Meanwhile Seven West Media may have backed the wrong horse. It bought a 19.9% interest in ARN back in November, presumably on the assumption that ARN would complete the SCA takeover and emerge as the stronger audio company. SWM proprietor Kerry Stokes may be wishing now that he’d invested directly in SCA instead.

Yesterday’s share movements are good indicators for what the market believes will happen. SCA’s slump suggests the market thinks the deal is going away. ARN’s slight improvement is open to interpretation, but my guess is that it means the market likes the fact that a deal is less likely.

ARN is both predator and prey. The shenanigans of the last few months helped ARN fend off any attempt Seven might have made to take control. In the meantime, the SWM share price declined, reducing that possibility.

Today’s AGM won’t give all the answers, but it will offer some clues.

Unmade Index slips as SCA takeover falters

The Unmade Index slipped on Monday as news of the faltering SCA takeover swept the board. On a day when the wider ASX All Ords stood still, the Unmade Index lost 0.48% to land on 535.4 points.

Southern Cross Austereo lost 8.99% to land on a market capitalisation only just over $200m, the company’s worst level since the takeover proposal first landed.

ARN Media nudged upwards by 1.79%.

Meanwhile, Nine improved by 1% despite its real estate platform Domain losing 1.3%.