The greatest balance sheet turnaround: Nine’s big opportunity

Nine Entertainment Co has gone from having more debt than it was worth to being debt-free.

This makes it unique among our legacy media companies, and rare among most companies. It makes the company’s CEO, David Gyngell, very confident.

“All those doomsayers out there are going to have to eat their words,” he told reporters yesterday.

“We have never had a more powerful balance sheet.”

The mammoth negotiations, which saw Nine’s major debt-holders exchange their debt for equity in the company, leave Nine’s CEO free to focus on the challenges facing the free-to-air television industry.

The challenges are significant.

Today, rival network Ten posted a $13 million loss for the 2011-12 financial year, due to a 14% decline in revenue. Television earnings before interest, tax and amortisation nearly halved, from $154.1 million to $82.4 million.

Veteran media analyst Peter Cox told LeadingCompany recently that in coming years, the internet would wreak havoc on television, just as it has done to newspapers.

“All media is in a very difficult and challenging world at the moment,” he says.

“With the National Broadband Network, there’s going to be more capacity, more on-demand and streaming services, and television is going to be under threat.”

This is why it’s so important for media companies to not be carrying around a lot of debt, Cox adds.

“When you’re looking forward at a television company, they would want to have the least debt possible for the company in the future…The less debt they have, the more the protection they have to change things.”

According to turnaround specialist Michael Fingland, Nine’s debt-free status is a huge opportunity.

“You can’t underestimate how much more firepower they will have to take on their competitors,” he told LeadingCompany. “They can now buy more programs, spend a lot more money when bidding for programs… they have this huge opportunity to improve their earnings.”

This is likely to be important for Nine’s new majority owners, American hedge funds Oaktree and Apollo.

Unlike previous private equity owner CVC, Oaktree and Apollo are likely to be more interventionist owners.

“Hedge funds are typically in a position where they want to exit a company in two to three years,” Fingland says. “They’ll want to make sure Nine’s management delivers them a plan that will enable them to quickly sell their equity.”

Nine is far more likely to be able to deliver such a turnaround now than it was before.

“It’s incredible the amount of time a management team spends on managing the various stakeholders when they’re in a crisis situation,” Fingland says. “It takes an enormous amount of time, and it distracts from the day-to-day running of the business as well as the broader strategic decisions.”

“That’s probably the biggest benefit in getting this restructure done. It takes up nearly half of the management’s time trying to deal with all those issues…. Now that they have no debt, that means management’s time, as well as all those interest payments on loans, can go back into the business.”

“Of course, it’s down to management to execute. They’ve got to take advantage of the position they’re in.”