CanWest MediaWorks: Brent Impey
By Jenny Ruth
CanWest MediaWorks' Canadian parent company is selling 30% of the company or 68 million shares through a float at $1.53 a shares or $104 million.
Before the final share price was set through and institutional book-building exercise, it was also going to sell an "over allotment" of 13.6 million shares which would have reduced its stake to 64%, but decided against this. It had been seeking between $1.50 and $1.65 a share.
The company's earnings before interest, tax, depreciation and amortisation (EBITDA) were $39.1 million in the year ended August 31, 2003 and are forecast to rise to $60 million this year and $61.1 million in 2005. Net profit after tax for 2005 is forecast at $6.9 million while net cash flow from operating activities will be $31.6 million. The float is being fully underwritten by Goldman Sachs JB Were.
SC: Were you disappointed by the final share price?
Chief executive Brent Impey: No, I was very satisfied with it. We were pleased it was above the lower end of the range.
SC: Won't the non-sale of the over allotment shares inevitably mean that there's an overhang on the share price?
BI: No. I think the reasons that CanWest have given, which is that they wanted to support confidence in the stock - and they made it quite clear right through the whole process that they weren't prepared to sell that over-allotment unless they were satisfied as to the price - I think that works in reverse. I think that builds confidence, rather than works the other way.
SC: Television is where the company's risks lie. Is TV3's current EBITDA performance sustainable?
BI: I agree that the biggest risk in the business is TV advertising because it does tend to go up and down according to economic trends. Having said that, TV advertising has gone up in each of the last 17 years except for three. While it does experience some short-term impact, if you look at it over a long period of time, that isn't the case. The profitability of TV3 has a number of factors to it.
1/ Advertising is based on program share,
2/ sales strategies which have been put in place under Colin Caldwell, our director of sales, over the last two or three years.
Next is more solidity in the schedule, consistent programming both leading into the news and out of the news into prime time. Another factor has been security of programming, deals with international distributors and also consistency in terms of local programming.
Probably above all has been the major investment here into the brand of TV3 which involved completely new branding put in place by Felicity Wood (former marketing director) - she passed away last year. We went away and had a management retreat about three years ago. We all agreed that the main issue for the channel was its brand. We've put a lot of effort into that and we're reaping the benefits of that. It's a much more solid business than what it was.
SC: Can C4 continue to be profitable during the down part of the cycle?
BI: If you look at the revenue over the years from TV4 before we switched to C4 (in October 2003), there's not a substantial change (it went from $6.3 million in 2001 to a forecast $5.4 million for the current year). The big change is that the programming costs are significantly different. C4 was budgeted to run at a small lost in its first fiscal year, but we're to return a small profit for the year to August. Going forward, it's going to be a more solid business. There were certainly issues when we launched C4. Music television as such had had a number of failures in New Zealand. There was a real issue for us in being able to sell the genre of music television and also be able to give some confidence that C4 wasn't a one night wonder. Having overcome those issues, we're pleased. To hit break-even for a television channel in its first year is a pretty good effort. Going forward, we're gradually introducing other programming into C4. We've recently done a deal with MTV. The plan is, as we go forward, we will add more resources into it, develop it steadily. It's very important for C4 that we remain credible to the audience. Within that there are balances between commercial and advertising considerations. It is a start up, no question, but it's first year is positive and its costs are low. Therefore, from an investment point of view, the risks are very low.
SC: How important is the Auckland radio market to your company?
BI: Auckland represents the biggest opportunity for growth. Outside of Auckland we're strong. We've just nicked ahead of our competitor in Wellington. In key markets like Christchurch and Dunedin we're well ahead of them. Auckland is our area of growth. We've got a new frequency to launch in the next year, but we've also got a couple of other initiatives planned for the Auckland radio market.
SC: What is the financial significance of the new synchronous transmission technology you're introducing to the Wellington radio operations?
BI: It's incorporated in the financials for 2005. It has cost in the area of $200,000 per frequency. The situation in Wellington is that historically radio stations have required at least two frequencies to cover the market. Synchronous transmission technology enables the same frequency to be used off multiple sites. For example, we've done it with The Edge in Wellington and the cost of doing that is in excess of $200,000. We have the ability to do that with other signals in the Wellington market to increase their leverage and secondly to enable us to develop new services in Wellington. For example, Solid Gold is on AM (at the moment). It will enable us to move it to FM.
SC: So this technology is specific to the Wellington market?
BI: Yes, it's Wellington specific - and also Northland.
SC: RadioWorks looks to me to be a fundamentally much stronger business than TVWorks. Do you agree?
BI: Radio's got the advantage of being 77% direct (advertising) business. We've got thousands and thousands of clients. Radio over the years has been largely immune to the ups and downs of the economy. Radio's a fantastic business. It has the advantages for advertising agencies for tactical promotion, support for television campaigns and some radio-only campaigns. In particular, it has that local advantage for local advertisers. Yes, it is fundamentally stronger. That's nothing to do with anything else but the very nature of the business itself and the nature of the two industries.
SC: What value will the company get from its parent company in exchange for the $1.4 million annual management services fee?
BI: CanWest is bringing to the table strengths in the purchasing of equipment (which) can come under corporate deals.
SC: You mean you can get things cheaper?
BI: Yes, and we can take advice in numerous areas where there are corporate deals. I think they've proven that they bring to the table real strength in terms of managing the capital of the business. I think that's proven to be significant. In the time that I've worked for CanWest, they've been supportive in terms of operations. They're not intrusive when it comes to the operations of either business, but when it comes to dealing with capital, that's when their strength comes through. They were very proactive when we did the RadioWorks takeover in 2000/01 and they were very proactive in this process. When it comes to corporate development, that's where they're particularly strong.
SC: The company is paying out more in dividends in 2005 ($9.2 million) than it will make in net profit after tax. Is that sustainable?
BI: The dividend policy going forward is (to pay) 75% of cash flow. I think that's sustainable. The issue is that in terms of anything we might be looking to do down the track, we can foresee small acquisitions or small start-ups in both radio and television. For example, we've just launched on Sky Digital Go Auto channels, a joint venture with Sky and the MDVA, or the radio initiatives we were talking about. We can comfortably accommodate that within cash flow without affecting the dividend payout. I can't foresee anything in the middle, let's call it $20 million to $60 or $70 million. Anything above that - and there's nothing being considered and there's nothing in the pipeline - we would have to come back to shareholders on. The dividend policy has been set given those factors.
SC: Why are your 2005 forecasts so conservative compared with the company's recent track record?
BI: In 2003 we made EBITDA of $39 million and we're forecasting $60 million for 2004. You can essentially split that into three parts: the $7 million turn-around in C4 from a loss to break-even, $7 million is due to the improved performance of TV3, which is primarily revenue driven, and $7 million is radio which is primarily revenue but also costs. Going into 2005, when we sat down to set the forecasts we took a lot of economic advice from the banks, we took into account what the NZIER (New Zealand Institute of Economic Research), the Reserve Bank and what our advisers were saying in terms of growth. There was talk, going back a couple of months ago, of a soft landing. We had a figure of 2.8%. We've based it on revenue going up 2.8% in the year. We do have a number of initiatives in place so they go up in both radio and TV to 3.5%. Were we unduly conservative? No, I don't think so. I think it would be fair to describe it as prudent.
SC: You don't want to be coming out with profit downgrades?
SC: Given the final price and that CanWest won't be selling the over-allotment, what is the company's share of the issue costs?
Goldman Sachs JBWere: The actual cost will be somewhere between $7.1 million (the estimated total cost if CanWest had sold the over-allotment) and $5.9 million, but it will be closer to $5.9 million.
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