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ASA works to salvage a return for shareholders of Network Ten

ASA position

The share register of TEN Network Holdings consists of approximately 17,000 retail shareholders. Amidst media reports about impending administration the ASA published a media release on 13 June 2017, raising a number of concerns. We were surprised that the TEN directors then chose to appoint voluntary administrators when the ASX announcement by the company on 14 June 2017 clearly set out the progress which had been made on a number of fronts. It was not clear to us the precise reason for the board’s decision to appoint a voluntary administrator so quickly, or the reason for reported personal threats against directors. The ASA wrote to ASIC noting we would be concerned if minority shareholders were being oppressed.

On 26 June, the ASA met with KordaMentha to encourage the administrators to work diligently to preserve and maximise shareholder value, whether by selling the business or returning the company to the directors. Given the announcement by Mr Gordon and Mr Murdoch to seek a joint recapitalisation proposal, we advised the administrators that the ASA would prefer to see KordaMentha conduct an orderly process, which focused on maximising competitive tension and valuation by first attempting to resolve the key issues, such as the proposed licence fee cut and new contractual arrangements with key suppliers.

We advised the administrators that the ASA was concerned that there were conflicts of interests with regard to the substantial shareholders and their respective nominee directors and their influence on financing arrangements and commercial negotiations. We were also concerned that these conflicts had not been properly managed or disclosed by the company. In light of the deficiencies in the company’s disclosures, we requested that the administrators take steps to inform the market on its progress and the size and nature of the various conflicts. However, disappointingly, the administrators did not make disclosures as requested.

On 7 July, the ASA met with receivers PPB Advisory. We encouraged the receivers to maximise competitive tension and work toward delivering some residual return for shareholders. PPB Advisory noted that the main duty owed by receivers to creditors is an obligation to take reasonable care to sell the assets for not less than market value or, if there is no market value, the best price reasonably obtainable. Again, we noted that shareholders should receive better disclosure through the ASX announcements platform and we encouraged PPB Advisory to make such disclosures.

On 28 August, PPB Advisory and KordaMentha advised the proposed sale of Network Ten to CBS Corporation. CBS will acquire 100 per cent of the shares in Network Ten but offer no compensation to shareholders.

The ASA wrote to the Australian Government on 28 August and met with Treasurer the Hon Scott Morrison MP on 31 August noting that the ASA is extremely unhappy that the 17,000 retail shareholders of Network Ten will not receive any part of the sale proceeds. We also noted that the bid from Mr Murdoch and Mr Gordon reportedly proposes Ten shareholders retaining 25 per cent of their equity and the network resuming trade on the ASX, while all creditors, excluding studios, are paid in full. Under these bid terms, retail shareholders would retain some equity value.

The sale of Network Ten requires shareholder approval and also approval from the Foreign Investment Review Board. The ASA has called on the Australian Government to seek a revised offer from CBS Corporation, one that includes compensation to the existing shareholders. We noted that 5-10 per cent of the equity slice is fairly standard in debt for equity swaps. A return to shareholders of some kind would facilitate shareholder approval of the takeover.

Context and timeline

On 13 June 2017, Network Ten requested to be put into a trading halt for 48 hours while it assessed its options, due to concerns as to its capacity to repay its debts. On 14 June, Network Ten announced it had gone into voluntary administration. Mr Murdoch and Mr Gordon, along with James Packer, were guarantors on an existing $200 million facility for Ten, from Commonwealth Bank of Australia, due to expire and be repaid in December 2017. Due their advice that they would no longer guarantee the loan, the board told investors it had "no choice" but to appoint administrators KordaMentha, given the risk of insolvency. When suspended from trading, Network Ten was trading at 16 cents a share and market capitalisation was $45 million.

On 16 June, Mr Murdoch and Mr Gordon, as shareholders owning 7.7 per cent and 15 per cent respectively, advised that they were forming a joint venture to propose a restructure to repay Ten's existing loan. Due to media law restrictions, Mr Gordon was not in a position to buy Network Ten because of the 'reach rule', which prevents a television network from broadcasting to more than 75 per cent of the population. Mr Murdoch was not in a position to buy Network Ten because of the 'two out of three rule', which prevents the ownership of a newspaper, TV network and radio station in the same market.

The government announced that Ten going into voluntary administration was a ‘wake-up call’ that its proposed media reform laws should be supported and passed in parliament. The media reform laws propose to remove the ’75 per cent rule’ and the ‘two out of three rule’.

Management at Network Ten noted that it had made significant progress to improve future earnings through cost cutting, renegotiation of programming contracts with US studios CBS and 21st Century Fox and a reduction in government licence fees. The company said that the company was expected to save between $50 million and $90 million a year through its cost-cutting program between FY18 and FY19. Savings from the reduction in licence fees are expected to be in the order of $22 million in 2017 financial year and $12 million in FY18.

KordaMentha issued a media release noting that Network Ten would continue to operate under its existing management and operating structures, and that the administrators would keep the business running. KordaMentha would also explore options for the recapitalisation or sale of Ten. KordaMentha also advised after the network's first creditors’ meeting that the sale process at Ten was not contingent on changes to media ownership laws and that the administrators had already received a number of expressions of interest to purchase the network.

The Australian Securities and Investments Commission (ASIC) raised concerns about KordaMentha's independence ahead of its appointment as administrator to Network Ten at a hearing in the Federal Court. The hearing was sought by KordaMentha to apply for an extension of the administration period, due to the complexity of the matter, which was granted. ASIC agreed to the extension.

On 3 July 2017, Commonwealth Bank of Australia, the largest secured creditor, appointed PPB Advisory as receivers of Network Ten. The receivers advised that the shareholder guarantors had

agreed that Ten could access a further $30 million of the $200 million facility from Commonwealth Bank until 31 August.

On 28 August, in a statement to the New York Stock Exchange, CBS Corporation confirmed it had entered into a binding transaction document to acquire the business and assets of Network Ten. CBS will refinance Ten's existing debt, including a loan from Commonwealth Bank and guarantor fees of about $33 million owed to Mr Packer, Mr Murdoch and Mr Gordon, and will implement a deed of company arrangement, according to administrators KordaMentha. It is understood that CBS is the largest unsecured creditor (it submitted a claim for $843 million during the administration process). A successful takeover would secure this revenue for the future.

Details of the CBS Ten acquisition and what creditors will receive will be provided in a report to creditors. Creditors will be given the chance to vote on the deal at the second creditors' meeting. PPB Advisory confirmed that the deal includes CBS delisting Ten from the stock market. According to a PPB spokesperson, CBS will acquire 100 per cent of the shares in Network Ten. It appears that shareholders will receive no compensation for their shares being taken over by CBS.

The takeover needs approval from shareholders and Australia's Foreign Investment Review Board.

Dated 30 August 2017


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