All eyes on Stokes

Seven Group chief Kerry Stokes is looming as the wildcard in the battle for Australia’s pay TV industry, with reports today suggesting Stokes could take on Rupert Murdoch by launching a counter offer for James Packer’s pay TV group, Consolidated Media.

Murdoch’s News Corporation lobbed a $1.97 billion bid for Consolidated Media last week in a move that would increase News Corp’s ownership of pay TV operator Foxtel from 25% to 50%.

But Stokes looms as the stumbling block to the bid. Seven Group owns a 24% stake in Consolidated Media and Stokes is yet to give much away about his intentions, other than to say he is “actively considering” buying more shares in ConsMedia. Indeed, this morning’s reports suggest Stokes has contacted the ACCC to discuss whether there would be competition concerns about Seven Group making a play for Consolidated Media.

That has commentators thinking about the mouth-watering prospect of Stokes and Murdoch engaging in a bitter bidding duel for James Packer’s prize.

It sounds exciting, but I’m not sure it’s actually going to get that far. Going to the ACCC and talking about buying more shares in ConsMedia are more likely to be tactics designed to keep everyone guessing about Stokes’ intentions and get him a little bit of breathing room to consider his options.

I reckon Stokes has got a few key options, starting with a rival bid to Murdoch:

Try to take on Murdoch and buy Consolidated Media

Possible, but there are a few real hurdles. Firstly, Stokes would need to spend more than $2 billion to better News Corp’s offer, and potentially much more should Murdoch make a counter offer.

There’s also the question of how Stokes would fund the deal. Deutsche Bank says Seven Group’s net debt will hit $1.8 billion by June 30. How much more could the group’s balance sheet sustain?

Finally, the ACCC might have concerns about the country’s leading free-to-air television network buying 25% of the nation’s big pay TV player.

Use his ConsMedia stake to get something else of out News Corp

Kerry Stokes has long lusted after a seat at the pay TV table, and that’s exactly what his ConsMedia stake gives him, so he will be loath to give it up. But if Stokes can’t afford a buy ConsMedia outright, perhaps he could parlay his support for the News Corp bid into something else in the pay TV world. There has been talk, for example, that Stokes might want access to the Foxtel network so Seven could operate its own pay TV channels.

Hold out for a better price

Stokes is already looking at a $120 million profit on his $480 million stake on his ConsMedia stake. Holding out and forcing News Corp to pay a little bit more would give Stokes and even better return on his investment. It might be the easiest, safest and smartest move.

As exciting as it would be, I don’t think Stokes will be seeking to take on Murdoch by launching a bidding war for ConsMedia. His smart play is to use his blocking stake to get something extra out of News Corp – be that more cash or a more direct involved in pay TV.

Stay tuned.