PBL To Split

Sydney, Oct 18, 2006 (ABN Newswire) - Will viewers notice any difference if the Nine Network is sold off by PBL, or will any of ACP's magazines read any differently or will Ninemsn be harder to access?

Nope. And there might actually be an improvement if the management of the Nine Network is changed.

In present indicators however, that's unlikely: the word is Eddie McGuire will remain in charge of Nine and the recently-appointed Ian Law at ACP.

And to make sure there won't be any change, the man responsible for much of Nine's woes in recent years, John Alexander, is tipped to remainPBL CEO and executive chairman of the media spin-off.Markets will be looking for an announcement today after the Wednesday morning media were full of reports naming the Citigroup-affiliated private equity groups, CVC and CVC Asia Pacific as the 'winners' of the 'beauty parade' by paying PBL $3.75 billion for a half interest in Nine, ACP and Ninemsn.CVC Capital, which owns Formula One motor racing, will buy the assets with its Asian venture CVC Asia Pacific Ltd.The duolast month agreedto buy Australian hospital operator DCA Group Ltd. for $1.7 billion. CVC Capital also was part of a bidding group led by New York-based Kohlberg Kravis Roberts & Co. that offered $17 billion in August for Coles Myer. So for all intents and purposes PBL and James Packer are just looking for a couple of well-heeled private equity buyers who can give him and the company $3-4 billion for 50 per cent of a bunch of media assets, one of which is impaired.

Sure they will do any deal to invest the money, but the pay off has to be in selling or listing the spun off company. So why not do it now and sell the 60 per cent of the media assets in an IPO?

PBL isn't going to buy the assets back from the private buyers in three or five years to give them a fat profit.

The Nine Network needs work but ACP doesn't and nor does Ninemsn. Loading on debt on these assets makes no sense unless there's an exit strategy in mind or in place, and that should be the focus of discussion. Where's the cash out, the pay-off for the investors? Local investors will be the key and so will the state of the markets in three to five years time.

Investment bank, UBS is advising PBL and has established a 'data room' for interested parties to drop in and spin the wheel and see if their card comes up as the lucky candidate to help pay James Packer a large amount of money for a group of 'old' media assets!From reports KKR, Texas Pacific, perhaps Newbridge Capital and CVC put in bids in the UBS-run beauty parade.

UBS Securities, the broking arm of UBS, issued a bullish valuation of PBL yesterday to clients but raised the question of capital gains tax on any sale or disposal of Nine, Ninemsn and ACP Magazines and indicated that this might create problems and complexities.

PBL shares were in a trading halt Tuesday morning awaiting an announcement.

Here's the UBS commentary.

"In the past, when a break-up of PBL had been mooted, we have been unresponsive to the scenario based on (1.) a view that the current share price did not significantly undervalue the asset base; (2.) a view that in a highly regulated industry like gaming, we considered it useful for PBL to retain the media/gaming mix and (3.) as PBL diversified its gaming interests into higher risk territories, when compared with Australia, PBL's $13b market cap diluted much of the risk associated with these investments."

"The expected change to the media rules has again opened this subject up for debate with, in particular, the removal of the foreign media ownership rules providing more sale options for PBL's media assets."

"We would argue that there is more potential option value in PBL today than there has been for some time, particularly on the Gaming side with Macau and the UK, and potentially Russia and Singapore. Moreover, we expect PBL will actively continue to assess options in other countries, particularly those undergoing regulatory change."

"A sale of the more mature media assets would give PBL the flexibility to pursue these other options. However, if this is the primary motivating factor, we would expect there must be some additional larger-sized opportunities for PBL, as we believe that the group's current balance sheet is comfortably strong enough to fund the already announced plans."

"Our sum of the parts is shown below. What we have not factored in, under any sale of Nine-plus scenario, is the capital gains tax implications for PBL. We expect these could be significant, and believe they could result in the proposal of a far more complex structure than has, to date, been speculated."

"There are two key areas of upside to our valuation currently, albeit clearly any success in new gaming markets may extend this list somewhat."

"Firstly, a private equity scenario for the ungeared media assets [Nine, ACP, ninemsn and UK Magazines] could be calculated to provide an IRR of ~20% at prices comfortably in excess of our current $5.5b valuation. We estimate a price as high as $6.5b could be justified based on what we view as achievable metrics for this scenario. However, part of this valuation upside would likely be offset by capital gains tax issues associated with the sale."

"Secondly, there remains potential upside to our Macau valuation. We currently value PBL's Macau joint venture as a 10x multiple of 2010E EBITDA, less debt [which we expect will peak at around US$2b] and discounted back at 15% per year. This totals $4.5b on an '07E basis, PBL's share being half. By contrast, based on the latest Melco share price of HK$17.08, we estimate the implied market value of the JV is around $7b, with the difference equating to around $2 per PBL share."

"We expect there would be significant capital gains tax implications associated with any sale, particularly of Nine, which was acquired in July 1990 for $200m. As per the group's 2006 accounts, PBL has a potential capital gains tax benefit, we assume relating principally to OneTel, of $138m, which would clearly be more than offset by any capital gain. We expect this would be a significant consideration in any deal were to PBL propose."

"If the end game were to privatise the Gaming assets, as has also been suggested in various press articles [AFR, 16th October], it is not inconceivable that a sale of all of PBL, accompanied by an agreement by the purchaser to sell the gaming assets back to CPH, could create a more attractive tax outcome, but confirmation and quantification of this from an external perspective is not possible at this stage."

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