Kerry Stokes forced to make changes to Seven/WesTrac merger

Minority investors in media group Seven Network have won key concessions from majority shareholder Kerry Stokes, who is trying to merge Seven Network with his heavy equipment business WesTrac.

Seven Network intuitional investors Ausbil Dexia and Perennial Value initially refused to back the deal, which will see Stokes emerge with 76.9% of the newly merged company, called Seven Group Holdings (SGH), because of concerns about the downside for small shareholders.

But under an agreement announced by Stokes this morning, Stokes’ private company, Australian Capital Equity, will cancel 15 million of the 115 million shares it will receive in SGH if the newly merged business fails to meet its target for earnings before interest, tax, depreciation and amortisation of $231 million by 2010-11.

The 15 million shares are worth about $130 million according to the terms of the merger.

Ausbil and Perennial, who control about 13% of Seven Network shares, have now agreed to support the deal.

Perennial managing director John Murray said in a statement that the deal satisfies its concerns over capital protection for minority shareholders if the deal isn’t as successful as Stokes hopes.

“If WesTrac doesn’t achieve the targeted profit level, then ACE is out of pocket to the tune of $130 million. Conversely, in agreeing to this clause, ACE is exhibiting strong confidence that WesTrac will meet that profit target. That should be very reassuring for all minority shareholders.”

The two fund managers had previously won concessions in the area of corporate governance, which had been seen as a problem area given Stokes will control so much of the company.

Stokes has agreed to increase the number of independent directors on the SGH board from three to five and has already engaged a recruitment company to start looking for board candidates.

The merged SGH will include Seven Network’s media and internet interests plus WesTrac’s heavy equipment business, which sells products under the Caterpillar brand in Australia and China.

The support of Ausbil and Perennial is seen as key if the deal is to be supported by shareholders at a vote on April 20. As Stokes is a related party to both Seven and Westrac, he is unable to vote at the shareholders meeting, which means the minority shareholders hold the key to the deal’s success.