NEWS

Seven West swings to $1.9 billion loss on television write-downs

Wednesday, Aug 19, 2015

Seven West Media chief executive Tim Worner claimed that AFL has major advantages over NRL for television advertisers as the company plunged to $1.89 billion into the red after write-downs but beat analysts' forecasts for underlying profits.

Mr Worner, who sat in on the biggest sports rights deal in Australian television history on Tuesday, said observers would be wrong to "do an apples-with-apples" comparison between Seven's $900 million six-year deal with the AFL and rival Nine's $925 million five-year deal with the NRL, which was struck last week.

"The AFL is a much longer game and there are far more advertising opportunities with an AFL game, including 30-second stoppages," Mr Worner told Fairfax Media after Seven reported underlying profits fell 11.5 per cent to $209.1 million.

"I regard the 30 seconds after a goal [in AFL] as the most valuable screen real estate on Australian television," said Mr Worner, who sat on a panel with Seven's billionaire chairman Kerry Stokes and News Corp chairman Rupert Murdoch to announce the historic deal.

Seven, which owns the top-rated metropolitan television network as well as Pacific Magazines and West Australian Newspapers, agreed to pay $840 million in cash and $60 million of advertising to secure 3.5 AFL matches a round for its free-to-air TV channels. The six-year deal will begin in 2017.

Nikko Asset Management portfolio manager Michael Maughan said: "The AFL is currently about 10 per cent of Seven's $1 billion annual TV cost base, and the cost of AFL has just gone up 50 per cent, which means their overall costs have gone up 5 per cent ... it is a material but not insurmountable impact on the profit-and-loss account of the group."

Mr Maughan also said advertisements served by Seven on games it has rights to will also appear during the same games screened by Foxtel or Telstra. "It shows you they want to make sure they are leveraging whatever content they have over all platforms using an advertising revenue model."

Seven shares, which are near historic lows, closed 0.6 per cent higher at 82¢.

Citi analyst Justin Diddams said the AFL deal had become "a deal of necessity" for Seven. "The company is essentially paying more money for less value in our view, but one could argue they had limited options," he told clients in a note.

News Corp is paying about $1.3 billion of the record $2.51 billion deal struck with the Australian Football League, with Telstra paying $300 million for digital rights.

Seven, whose biggest shareholder is Mr Stokes, reported a $1.89 billion loss for the year to June after writing down the value of its television licences by $929 million, following more than $1 billion in write-downs in the December half.

"The board felt [the TV licence write-down] was the prudent thing to do given current and recent operating conditions," said Mr Worner. "We've got new entrants in the market, we've got pressure on costs and also there's questions around television advertising market growth growth so I think given those factors, and they are recent factors, the board has taken what I believe to be a very prudent decision."

Mr Worner said the write-down – which leaves Seven's TV licence recorded in its accounts at $1.37 billion – underlined its growing calls for the industry's $153 million annual licence fees to be cut or abolished, calls the government is reviewing.

"I think the government has accepted that we do have a compelling argument, hopefully we are at a stage now where it is a matter of when and not if," he said. "I don't want to pre-empt any report but I do feel as though we have a compelling arguments when you look at what these other market entrants are able to get away with."

Seven, which is facing competition for audiences from the likes of United States streaming giant Netflix, predicts "low single-digit growth for television, newspapers showing early signs of improvement in trend and a continuation of trend for magazines".

Operating cost growth is expected to remain below CPI (excluding third-party commissions and events) with underlying group earnings before interest and tax expected to be 5-10 per cent lower than in the full year to June 2015.

Excluding write-downs, the media group's underlying profits fell 11.5 per cent to $209.1 million as revenue softened 4.7 per cent to $1.77 billion. Analysts had forecast a profit of $208 million, according to Bloomberg's consensus estimates.

The net loss compares with a $149.2 million profit in financial 2014. The final dividend, payable on October 9, is 4¢, down from 6¢ last year.

At its half-year result in February, Seven wrote off $961 million of television goodwill, $65.7 million of magazines and newspapers goodwill, and $38 million of magazine and newspaper mastheads and licences.

It said most of the $2.1 billion impairment for the full year "relates to television goodwill and licences recognised as part of the 2011 West Australian Newspapers-Seven West Media transaction".

Mr Worner said the company was undertaking a review of the strategy it set out in May 2013 and would report back to the market by the end of the year, when it is expected to say more about its mobile strategy.

As part of that strategy, Seven launched its live-streaming product TV Everywhere on Tuesday, beginning with its Sunrise breakfast show.

 

smh.com.au