Investment Matters

What matters this week

The proverbial backfire of the week - and perhaps of the year - goes to Lachlan Murdoch and Bruce Gordon (of regional Win network fame).    The Channel Ten backers pulled the debt rug out from the company in June, putting it into administration.  They subsequently, and not unsurprisingly, launched a takeover offer.  The ACCC approved this, but it required media law change through Parliament, particularly the two-out-of-three rule (Murdoch already owns newspapers and radio in Ten's markets).  

So it could be rightly hypothesised Murdoch was attempting to force the government's hand on media ownership - change the ownership rule, or Ten will cease to exist - whilst gaining control of Ten Network.  Double win.  BUT oops, along came a takeover offer from US-based CBS - content provider to Ten and liability holder itself.  Mr Murdoch and Mr Gordon are now sitting on their hands out in the cold (not literally).

Non-Murdoch shareholders face being wiped out.  The lesson of this from a shareholder perspective - be comfortable with the counterparties you get in bed with.  And perhaps now the government can get on with some sooo overdue media reform (excluding the two-out-of-three rule!).

And as for Telstra... What happened?  Telstra came up with a not-so-ingenious plan to reduce its debt and essentially bring forward dividend payments to shareholders - by securitising the future cash payments from NBN due to Telstra as compensation for use of its (very old) copper network.  Securitisation is a form of financial engineering.  In this case, someone would have given Telstra money today so that they can receive the cash payments from the NBN in the future (the securitiser would make money by giving Telstra less than the worth of the future cash flows).

NBN said uh-huh, using a veto clause in their agreement with Telstra.   It cited risk - for instance, they see "an uncertain amount of risk" and the "reduction of flexibility in the face of uncertainty" (quotes from Bill Morrow NBN CEO in the AFR 31-Aug-17).  What risks?  What don't we know?  What is the NBN fearing about the future?  What other clauses are there in the Telstra agreement?  Is Telstra not delivering what it is committed to under the agreement?  Telstra analysts have speculated things like NBN technology is being leapfrogged (e.g. 5G) and complications in any renegotiations between NBN and Telstra.  Certainly, it feels there will be more in the future on this one.

What this should teach us that you can't financially engineer your way out of a problem.  Or in Telstra's case many big, hairy and converging problems - debt; revenues under serious pressure; the huge capital investment required to stay ahead of competitors; poor customer service; uncompetitive relative product/service pricing; and an unsustainable dividend (which the cut announced last week has moved to at least partially address).  Telstra's share price ($3.66) is heading back to float levels (T1 $3.30* Nov-91, T2 $7.40* [ouch!] Oct-99 and T3 $3.60 Nov-06).

This week was also the last week for the stragglers to report their results for the period ending 30-Jun-17 (to be fair though, smaller companies are at the end of the line for in-demand accountant and auditor services). 

Harvey Norman increased profit 28.8% (or 18.6% if property revaluations are excluded).  The share price fell -7.4%.  Speculation, including in the AFR, raised serious accounting concerns and irregularities. This one is starting to smell a little fishy.

Good results were released by Webjet, lithium producer Orocobre, petrol refiner and retailer Caltex, clothing retailer Noni B, the recently listed provider of plumbing fittings Reliance Worldwide, footwear distributor and retailer (including Athlete's Foot) RCG, and copper producer Sandfire.

Facing tough conditions were Specialty Fashion (retailer including Millers, Katies and Rivers), Mantra hotels and resorts, Cabcharge (caught an Uber lately?), Adairs (but it seems to be getting back on track to be fashionable again), aged care operator Japara Healthcare (outlook disappointed), and Blackmores (but with a return to profit growth in FY-18).

*Institutional investors paid more.