Aussie media laws switch gears, postpone analog switch.

In 2007, the traditional Australian media landscape looks set for change--possibly radical change--as new laws removing many of the previous restrictions on media ownership come into force. The new laws could severely alter the landscape in a sector identified by Professor Glenn Withers of the Australian National University as offering one of the three highest returns on investment (ROIs) in the country, along with banking and pharmaceuticals.

Proposals to alter the laws concerning media ownership were published in March 2006 and received a decidedly mixed reaction, foreshadowing a somewhat bumpy ride through parliament. Initially, prime minister John Howard proposed abolishing all regulations governing the ownership of media assets, but following strong parliamentary objections, agreed, late in the day, to amend the proposed cross-media ownership rules to forbid the ownership of more than two major assets in one market. Now, it is possible to own any two out of the three major media of radio, print and television, but not all three.

The previous limits on foreign ownership restricted overseas companies to a maximum stake of 25 percent in a metropolitan newspaper publisher and 15 percent of a broadcaster. They have been completely abolished. But the general view is that the immediate to near future will be more about the realignment of existing players than the arrival of foreign predators, with one significant exception: the increasingly ubiquitous private equity firms.

Peter Ickeringill, legal director, Asia Pacific, of the U.K.'s Daily Mail and General Trust (owners of a number of key Australian radio assets) explained: "Australian media assets are currently trading at levels which are historically very high. A lot of them are trading in multiples of 40, and some even higher than this. This means that any foreign trade player looking to invest outside their home market can certainly get a better bang for their buck in markets such as Latin America and Asia. Also," he continued, "Australia already has a small number of large media players--certainly as compared to the U.S. and the U.K.--and this existing concentration of ownership would make it very difficult for an overseas trade player to enter the market."

Ickeringill stressed that he was talking only about trade players, as he expects that there might be scope for private equity companies to take advantage of the new regulatory environment. Indeed there have already been examples of this. Last November, a joint venture was announced between New York-based private equity firm KKR and Seven Network to form the Seven Media Group, into which all the broadcasting, publishing and online activities of the Seven Group have been folded. This move, which values the assets at A$4 billion (U.S.$3 billion), follows KKR private equity group rival CVC Asia Pacific's purchase of 50 percent of Packer Publishing and Broadcasting's media assets for A$4.5 billion (U.S.$3.5 billion).

Ickeringill pointed to several reasons why the situation is much more attractive to private equity groups than to trade players. "Firstly," he explained, "private equity companies have so much money looking for a home that the high multiples are less of a deterrent to them than they would be to trade players. Also," he continued, "private equity funds are prepared to leverage their acquisitions to a far greater extent than trade players will endure. Consequently, very high multiples are less of a hurdle for them. Finally," he concluded, "these groups do not have expertise in the management of media assets and, so, access to experienced management in the field is much more attractive to them than it would be to an existing media player."

Adrian Young, head of media banking at Barclay's in London, pointed out in the Financial Times that, with the exception of Seven, "Australian media groups have very low gearing, and this makes them particularly attractive to private equity investors."

According to Ickeringill, "In the long term, the implications will likely be confined to existing domestic players, and that means a greater concentration of ownership. Inevitably," he went on, "this will lead to a slight reduction in the diversity of views, although I doubt the concentration of ownership will be as great as some commentators have suggested."

He also sees some benefits from these changes: "The flip side of this concentration," he expounded, "is that as media owners become larger, and consequently better able to control their own destiny; they will be much readier to invest in new products, especially in multimedia, the Internet and digital outlets."

Jonathan Page, head of TV and Ancillary Sales at Becker Entertainment, one of Australia's leading distributors, agreed with Ickeringill that there will be increased concentration of media ownership, but not as significant an increase as many have predicted. But he sees the emergence of new Internet players differently. "Online companies can establish themselves very quickly," asserted Page, acknowledging, "some will get bought up, but others will have the opportunity to establish themselves very quickly as leading media operators." He stressed that this expansion of activity on the Internet can provide effective diversity of voices, something Australia needs. In fact, News Corp. and Fairfax dominate the Australian newspaper market, and the former has just used the relaxation of the laws to take a 7.5 percent stake in the latter.

The new legislation has also caused a delay in the introduction of the analog switch-off, which now will not happen until sometime between 2010 and 2012. A senior executive at a Hollywood major, who asked to remain anonymous, saw this as simply, "The postponement of the inevitable. If the three nets are smart," he said, "they will use the time to ensure they have the best possible strategy in place for the switch to digital because that's where the story's at." He is also in agreement with Becker's Page that, "we will see some smaller players enter the fray as well as the more obvious larger ones."

Although he added that, "In the long term, the Australian market will come to more closely resemble other markets around the world, and these changes will introduce more liquidity and create greater value for all concerned." BJ