Has CanWest cut off its news options to spite its share price?

By John Drinnan

Friday 16th July 2004

CanWest MediaWorks has enjoyed some breathlessly positive media coverage for its float. Early coverage in the New Zealand Herald published leaked details of the proposed float and painted CanWest's sale of 30% of the company in glowing terms.

But the market came back with a final price of $1.53 a share, near the bottom end of the $1.50-1.65 price suggested by CanWest.

The Canadians will extract about $104 million for selling a 30% stake, although TV3 and C4 programming has probably received a similar amount in taxpayer subsidies from New Zealand On Air.

Now the excitement of a new media stock has died away, observers will have a more sceptical view of the share, which still reflects on CanWest's approach as a frugal manager that has nursed TV3 through recessions.

Successful radio operations have been on board since 1997 (More FM) and 2000 (MediaWorks) and CanWest is enjoying an unprecedented boom in advertising.

It is good news that New Zealanders will again be able to trade locally in a media stock and the profits will not flow offshore.

But the broadcasting is a business like any other and CanWest is naturally enough accentuating the positives while not shouting about the vagaries ahead.

TV3 news anchors John Campbell and Carol Hirschfeld were glamorous front people at the launch but brokers and advisors are unlikely to be swayed by their involvement.

Smart investors will be more taken by the radio assets than the two TV channels. Radio advertising is at the lower end of the ad market and not as subject to volatility in corporate advertising spending as TV.

But TV3's performance is probably better than indicated by press releases, which report the TV operations made a significant profit only in 2003.

Before the purchase of the radio assets, including four nationwide networks, money-losing TV4 had a "generation X" (actually B-grade) programming mix that failed to fire with the public.

CanWest had to write off about $20 million in programming costs over four years, a process that knocked back profitability and, more happily for CanWest, its tax liability. The decision by previous management was a big cockup on the scale of TVNZ's ill-fated investment in Horizon Pacific regional channels and MTV.

Conventional wisdom tells us the present ad boom will dissipate. Attracting advertising is clearly the sharp end of the business and CanWest has a reputation for having a sharp sales operation.

But in its present business model, TV3 is aimed at having high market share in its target 18- to 49-year-old demographic and to do that it needs plenty of local content subsidised by the taxpayer.

The channel faces several issues.

Broadcasting Minister Steve Maharey is reviewing the system for handing out money for TV shows. CanWest insists it could survive profitably on a different business plan with less local content and, presumably, a lower audience share.

Nobody expects TV3 will lose access to the public funding trough, but the stock is plainly subject to the vagaries of government policy. Radio New Zealand is promoting the idea of a youth radio network that would compete in the advertising market.

CanWest's role as majority shareholder in the New Zealand company is secure for the next 12 months as required by NZX rules. After that there are no guarantees and rumours abound that it will further sell down its stock.

CanWest's only competitor so far has been TVNZ. But Kerry Packer's PBL is expected to take up a 50% option in Prime Television next year. It is already managing the station and ramping up resources

The marketing for TV3 is tied directly to newsreaders Mr Campbell and Ms Hirschfeld. They are still under contract. But can TV3 still keep Mr Campbell on board when he has limited prospects to be anything other than an autocue reader? TVNZ would like to hire him.

The news and current affairs operations at TV3 are in a flux after TVNZ outbid it for exclusive free to air rights to the American ABC Network's programmes, including 20/20.

ABC newscasts, which form a key part of the 3 News and Nightline packages, and the high-rating 20/20 will be gone next year. Another sad loss will be the late night rebroadcasts of the ABC show World News Tonight with Peter Jennings.

TV3 may move the CBS-sourced show 60 Minutes from Monday to Sunday. The channel insists the loss of 20/20 will not mean job cuts.

TVNZ is expected to use the 20/20 material to fill Sunday, show fewer local stories and save money. It is clearly hoarding programming to starve other broadcasters and is back in its old habit of being a monopolist.

But TV3 is notoriously frugal and has ended up with just two news rights CBS and ITV compared with TVNZ's seven.

TV3 news may have a fight ahead to maintain its news ratings because it has let itself be shut out of the market. It could find a way out. But the Canadians may have been too frugal for their own good.

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