Signal 23.10: A reshaping of Australia's radio landscape?

This week: Last week ARN made a non-binding offer to acquire Southern Cross Austereo in what was one of the only media M&A plays we have seen in a pretty subdued year. This week is a focus ?on the proposed ARN takeover of Southern Cross Austereo, and what it means for each of the 3 parties involved: ARN, SCA and Anchorage

ARN

What’s new:?ARN is the main driver of this potential radio consolidation. If the deal is to go ahead, the newly reshaped ARN will include its existing KIIS asset, however it would divest the Gold FM brand and it would onboard the majority of Southern Cross Austereo’s regional radio assets into its integrated regional offering. It would also most likely (at least from outside-in analysis) move away from its IHeartRadio partnership (more of this in point 3)

Why it matters: When ARN purchased 14.8% of SXL shares earlier this year it was unclear whether this was just a transaction aimed to generate a return if SXL improved in valuation (as ARN had some cash on hand and wasn’t particularly active in investing in R&D or acquisitions), or whether it was something larger. That 14.8% made ARN the largest shareholder in SXL and one of only 5 shareholders who collectively own the majority of the company. ARN looking to divest Gold and onboard MMM demonstrates that ARN is looking at broad audience men (MMM) and women (KIIS) brand plays, with a large regional offering that can syndicate freely from both Kyle & Jackie O as well as AFL, NRL and Cricket.?

What’s the investment thesis?:?The investment thesis in my view is based on Triple M being a better for ARN as well as a nationally networked structure. ARN can focus on KIIS as a women led broad offering (anchored by Kyle and Jackie O) and Triple M as a male focused, music offering with sport across the year. The regional networks can use both of these assets and KIIS and Triple M can also run more nationally focused content on their metro broadcasts. It’s not a radically re-engineering but it does provide a clearer proposition and more potential for content creation cost cutting.

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SOUTHERN CROSS AUSTEREO / NEW SXL

What’s new:?Under the deal, Southern Cross Austereo will exist as a new, non-listed entity. This will include the Hit brands, as well as Gold FM, plus the regional TV network. Listnr would also back out of SXL and move into a third company (see point 3). This company will be under the control of Anchorage.

Why it matters: The new ownership of SXL (if the deal goes ahead) can attempt a circuit breaker to improve the EBITDA performance of the regional TV business. SXL is paying approximately 48% of revenues in content fees to carry the Ten signal and the EBITDA figure for half 2 of F23 was $4.3m. Investors have held concerns around the profitability of the regional TV network, and based on the existing cost base and content fee it would be difficult for this business to generate more than $10m in EBIT for the full FY24. On current revenue, a 1 percentage point reduction in the content fee is worth $1m to SXL’s bottom line, so expect the new owners to seek to reduce this. At the same time, if the deal goes ahead the new SXL has to onboard Gold FM (and it’s unclear whether the more successful Gold talent such as Christian O’Connell and Amanda and Jonesy will remain with Gold or transition to Triple M)

What’s the investment thesis:?The main thrust for the new SXL (owned by Anchorage) is around cost saving. A TV content licencing reshape could save $8m a year. The removal of Listnr into digital newco (see point 3) will help increase profitability and private equity businesses generally come in and find operational savings as well as unexploited market opportunity. One possibility is Anchorage is simply minding the assets for ARN until they can find a way to make the government loosen radio ownership restrictions

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DIGITAL NEWCO

What’s new:?Under the proposed transaction, both SXL and ARN’s digital assets will be housed in a new private company which I’ll call ‘Digital newco’. This will be the Listnr platform, plus podcast network from SXL. As well as the podcast network from ARN. The assumption here is digital newco will be similar to what Hulu was in the US when it had equity holders in ABC/NBC and FOX and had its own operations, sales team etc but pooled its content on one platform.

Why it matters: Both ARN and SXL have struggled in making their digital investments pay back in terms of profit, but SXL has been much more vocal publicly around its ambitions for Listnr. ARN and Listnr have competed head to head for podcast scale and reach supremacy, combining them creates a clear number 1 in podcasts when it comes to representation. The challenge for both is a significant amount of consumption of both parties content occurs on Spotify and Apple. Moving these assets into a private company provides the best way to create a stand alone organisation, reduce the relative cost of technology, and seek to create an asset that is perceived by the market as a technology business and not a radio station. ??

What’s the investment thesis:?ARN will be hoping podcasts can grow by 20% annually over the next 3-5 years. This could mean revenue for the newco of $60-65m. A focus on Listnr and usage of Listnr tech (which should be already majority developed by SXL) will mean ARN can seek to remove themselves from the IHeartRadio licencing agreement. And a consolidation of the top 2 podcast networks should reduce competitive bidding tension which should mean less onerous costs in obtaining podcast content and removal of expensive and unprofitable content. All of these together, combined with an operating margin of 25% (ambitious) and an EBITDA multiple closer to tech companies than broadcast media ones (20x instead of 10x) could mean the digital newco is worth $300-350m in 3-4 years if the execution is sharp. ARN and Anchorage can spin this out into a new listed business or roll the radio assets into the digital newco via a reverse takeover.

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