The SCA Restructure: Looking for Hidden Agendas

When I heard the news that Southern Cross Austereo was saying ‘adios’ to their Head of Regional Media, Rick Lenarcic, and, combining regional radio with metro, I asked myself ‘has Grant Blackley gone nuts?’

Everyone in the industry knows regional and metro media don’t play all that well together; they’re two different cats.

In fact, their culturally, so far apart, that they’re two entirely different animal species, if you want to continue that metaphor.

Now, here was SCA’s top regional honcho walking off into the sunset, like John Wayne, taking with him years of regional experience and know-how.

So, I thought, why would Grant Blackley restructure out the guy, who had ridden shotgun over about 80% of the company’s revenue for so many years?

Then, to top it all off, pour metro and regional radio into one big melting pot.

To me, as a former regional network owner, it just didn’t make sense.

Then, I thought, ‘Grant’s too smart to make such a basic mistake on a whim, so there’s gotta be a different agenda in play’.

In the last couple of months, SCA has shed nearly a dozen highly-qualified technicians from its regional operations.

It’s got rid of its shopping centre video screens business, and, the people who ran it.

They’ve implemented almost a blanket ban on travel, and, who knows what other cuts have been happening behind the scenes, that aren’t yet public knowledge.

Let’s face it, right now, Grant Blackley appears to be slimming down SCA faster than a 10-week challenge at Jenny Craig.

So, why would he be doing this, at this particular point in time.

Back 18 months ago, everyone in commercial radio was getting mighty excited over the prospect of Media Reform.

It was the buzzword of the moment.

Communications Minister, Mitch Fifield, must have nearly had flat fingers at the time.

Rarely did a day go by, when free-to-air radio and television owners didn’t turn the thumbscrews on him, to get the media reforms through both houses of Parliament, without delay.

Trouble was, despite all efforts with the Senate’s cross-benchers at that time, the Minister, couldn’t get all his ducks in a row to support the ‘more flexible’ media ownership amendments.

When you see words, like ‘more flexible’, you know someone stands to make a truckload of money in the not too distant future.

One of the more contentious aspects of Media Reform was the abolition of the ’two out of three’ rule.

That rule meant one media company could only own two assets in a single licence area; for example, a newspaper and a television station, but not a radio station, or maybe, just two radio stations and no other media.

The amendments would allow media operators to own all three types of media in a single market, and, the restrictions on what percentage of the Australian population could be covered by a single television network would be cast into history.

Whispers in the industry at the time were that SCA was closely eyeing off the Nine Network, and, counting the days for those amendments to pass.

Back then, in February 2017, SCA was looking pretty good.

Its share price was sitting around the $1.40 mark.

Given that share price, SCA’s market capitalisation at the time was sitting around $1.2-billion.

Market capitalisation is how much the company is worth on the stock market.

It’s the number of issued shares multiplied by the share price.

A high value of market capitalisation is a definite plus to a public company, when it comes to borrowing extra funds to mount any form of merger or acquisition.

Nine Entertainment, on the other hand, had a share price that was hovering around $0.90 in February 2017.

It’s market cap, at the time, was probably around $900M, not a ‘walk in the park’ as a takeover target, but within reach, if SCA had been able to mount an offer at the time.

But, of course, timing is everything.

As it turned out, it took the merry band of coalition lobbyists, until late October last year, to kiss enough butts in the Senate to finally get those legislative amendments through.

It must have been extraordinarily frustrating for the Board and senior management at SCA to watch what happened to, what many believed, were its dreams of a Nine Entertainment takeover.

Since February last year until April this year, SCA stock found itself on a rather slippery slope; the share price was down nearly 25-percent, at $1.08, before it finally turned north again.

Consequently, SCA’s market capitalisation also took a tumble into the $800-900 million area, while the shares were at their lowest.

While $800-million is not all that shabby by any measure, if SCA had been looking to acquire Nine back then, day after day they would have been watching those dreams go up in smoke, as their share price eroded.

Nine Entertainment has had a stellar run over the past 18 months, shooting up from its $0.90 in February 2017 to currently be trading at around $2.45.

Nine has subsequently jumped from a market cap of less than $1B, to a massive $2.13B.

It’s now a monster!

So, it doesn’t take a genius to work out that SCA is now the little fish that is potentially being circled by a Great White, that is, if Nine happens to be in the acquisition market.

Getting back to June’s restructure of SCA, as far as I can see, there are a couple of likely scenarios.

Either Grant Blackley now, metaphorically, has SCA all tarted up in a cute mini-skirt, with a new alluringly slimmed-down form and bright lipstick to impress the suitors, or, he’s trying to turn the company, once again, into a lean, mean fighting machine.

If it’s the former, then the restructure is all about trying to get their EBITDA to its optimum level.

Media operations, like many businesses these days, sell on a multiple of EBTIDA. (Earnings Before Tax, Interest, Depreciation and Amorisation)

If SCA shareholders are going to have to part with a profit-producing network in a takeover, they’re going to want to be paid top dollar for their shares.

You can’t massively increase revenue quickly, but you can cut costs rapidly, so SCA may have taken the most expedient route, to get to the results they’ve wanted.

Generally, this type of cost cutting only has short-term benefits, but that’s all they may be after.

A group, like Nine Entertainment, may have indicated, that if they do a deal with SCA, they would want the business operating at optimal efficiency.

That is not something that a buyer would normally do.

Most buyers want to acquire under-performing assets for the lowest price and then improve the EBITDA themselves, increasing the value of the business for shareholders.

So, it’s possible SCA may actually be readying itself for a merger.

Common sense says that, given SCA’s major program affiliation, Nine Entertainment would be the most likely bridegroom in a merger, but, you’d be foolish to rule Seven out altogether.

Of course, this theory could well be way off-base, so, there’s yet another scenario to consider.

June’s restructure may have been made to get SCA back in the acquisition game.

Since its low in April, the SCA share price has started climbing the ladder once again, improving SCA’s capitalisation, and consequently, its ability to borrow.

If its borrowing strength continues to rise, in terms of a takeover, it may not be inconceivable to see ‘the canary try to swallow the cat’. Yes, another animal metaphor!

While my entire assessment is speculation, I’m pretty sure now, that last month’s restructure had very little to do with SCA realigning its radio operations, so that regional stations could benefit from the great wisdom of those, who operate 2DAY-FM.

What I am more certain of is that the Mexican stand-off, that’s existed in the industry since the media amendments passed back in October, is starting to teeter on the verge, just waiting for one of the major players to blink.

While the coming events in media ownership will, no doubt, be an interesting game of ‘cat and mouse’, I think it’s such a shame that so many skilled people will eventually have to pay with their livelihoods, so that the ‘Big End of Town’ can play media monopoly.