Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Time for APN's NZ assets to float locally

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Most Australian companies say economic conditions are better in New Zealand than across the Ditch

New Zealand accounts for 40 per cent of APN News & Media's revenue. Photo / Sarah Ivey
New Zealand accounts for 40 per cent of APN News & Media's revenue. Photo / Sarah Ivey

APN News & Media, which owns the New Zealand Herald, was strongly criticised by shareholder activist Jack Tilburn at the company's recent annual meeting in Sydney.

Michael Horton, ex managing director of Wilson & Horton, sat quietly in the audience as Tilburn, the Australian equivalent of the late Max Gunn, berated the board on a number of issues.

These included the undue influence of Irish business tycoon Denis O'Brien, APN's board structure, its focus on the irrelevant New Zealand economy and an inadequate annual report.

Chairman Peter Cosgrove projected a positive medium-term outlook for the group, particularly in New Zealand, but Tilburn was having none of this. He berated the board for giving too much attention to a country with only 3 million people.

Tilburn's trivialisation of New Zealand, which included understating our population by nearly 1.5 million, made it clear that it is time for APN's New Zealand assets to be returned to New Zealand ownership.

We have bought back Trade Me and Rupert Murdoch's stake in Sky Network Television so why can't we buy back APN's New Zealand assets?

APN was established in 1968 when a number of newspaper families consolidated their interests into Provincial Newspapers.

In 1988, Provincial Newspapers was acquired by Independent News & Media (INM), the Irish company controlled by Dr Tony O'Reilly.

Provincial Newspapers listed on the ASX in 1992 and changed its name to Australian Provincial Newspapers.

Three years later it bought radio interests in Australia and in 1997 acquired a 25 per cent interest in TRN, New Zealand's largest radio operator.

In December 2001, APN acquired Wilson & Horton in New Zealand for $809 million.
This acquisition included the Herald, nine regional daily newspapers, 40 non-daily newspapers and magazines, commercial and security printing operations, outdoor advertising and a further 25 per cent interest in TRN.

In 2007, APN received an A$6.20 a share takeover offer from a consortium including INM and two private equity firms.

The offer was made under a scheme of arrangement that required 75 per cent shareholder approval.

More than 79 per cent of shareholders by numbers approved the scheme but large shareholders voted against the A$6.20 a share takeover offer and the motion was defeated. APN shareholders made the wrong decision as the company's share price declined steadily after the rejection of the takeover offer.

By the end of 2007 its share price had slumped below A$5 and reached an all-time low of just A25c this year before its recent recovery.

Meanwhile INM, which owns 29 per cent of APN, has also had a big share price slump.
O'Reilly acquired a controlling interest in INM for just 1.1 million in 1973 and the company embarked on a worldwide media acquisition spree.

These purchases were mainly financed through debt because O'Reilly didn't want to dilute his shareholding.

Denis O'Brien, Ireland's third-wealthiest individual with an estimated fortune of $6 billion, started buying INM shares in 2006.

O'Brien and O'Reilly had a bitter battle to gain control of the Irish media group with the former getting the upper hand because O'Reilly's shareholding was diluted through recent INM equity issues.

However, it has been a hollow victory for O'Brien because INM shares were trading on the Irish Stock Exchange at only 3.5c this week, giving it a total sharemarket value of just 19 million ($30 million).

The ailing Irish company recently announced an agreement with its banks that has given it a better chance of survival. This agreement includes a requirement to sell its South African business, to reduce staff numbers by 10 per cent, to restructure its hugely indebted pension fund, to raise further equity and to allow the banks to obtain an equity position. This shareholding is likely to be less than 20 per cent of INM.

Meanwhile, APN has also had more than its fair share of controversy, particularly this year when a proposed equity raising was abandoned and the chief executive and four board members resigned.

These directors included John Maasland from New Zealand.

The board now comprises chairman Peter Cosgrove, Ted Harris, and Dublin-based Paul Connolly and Vincent Crowley. Tilburn believes that the latter two represent O'Brien, which gives O'Brien too much influence.

There are currently no New Zealand directors even though this country accounts for 40 per cent of group revenue.

Cosgrove said the company was committed to expanding the number of non-executive directors with at least two new directors, who are Australian or New Zealand residents, before the end of the year.

He told the meeting that the resignation of the chief executive and four directors was through a disagreement over whether the company should have a capital raising.
Cosgrove said: "The departing directors believed that a capital raising should be undertaken at the time the company announced its full-year results [for the December 2012 year]. The current directors believed that a capital raising should be undertaken in a timeframe to allow other options to be pursued."

One of these options could be the sale of some or all of its New Zealand assets.

Cosgrove said the company had extensive cost reduction programmes which delivered $25 million of savings in 2012 with another $25 million planned for this year.

He said the total impact of these measures would not be fully felt until 2014.

As far as the March 2013 quarter was concerned Cosgrove said the New Zealand Media division, which includes the Herald, had suffered further revenue declines but cost savings had more than offset this.

As a result its earnings before interest, tax, depreciation and amortisation (ebitda) were slightly ahead of last year.

The Radio Network in New Zealand is benefiting from a growing radio market and has gained market share in each month during the quarter.

APN, and most Australian companies, say that economic conditions are much better in New Zealand than Australia at present.

Tilburn was highly critical of director Paul Connolly, who owns 142,857 INM shares but has no APN holdings.

Connolly was also a director of two other O'Brien companies, Esat, an Irish telecommunications company, and Digicel, a Caribbean-based telecommunications company.

O'Brien made his fortune through these two companies.

Tilburn accused O'Brien of pulling too many strings at APN even though he holds only 30 per cent of INM and INM owns just 29 per cent of APN.

He wanted to know whether Connolly represented O'Brien or INM or whether he was acting in the best interest of APN.

Cosgrove assured Tilburn that Connolly, and all other APN directors, always acted in the best interest of APN.

Connolly was uncommitted when Tilburn asked him whether he would buy APN shares.

The links between INM, APN, NZ Media and NZ Radio raise real difficulties in governance.

The obvious solution is for INM to focus on its Irish assets and for APN to concentrate on Australia and sell its New Zealand operations. INM has already taken steps in this direction by agreeing to sell its South African assets.

Why aren't our investment bankers working on the IPO of APN's New Zealand assets or the sale of these operations to private New Zealand interests?

Does Michael Horton's attendance at the APN annual meeting indicate that the original founding families are interested in becoming involved with the Herald again?

Certainly the time is right for New Zealanders to reclaim the Wilson & Horton assets sold to highly leveraged Irish/Australian interests more than a decade ago.

Brian Gaynor is an executive director of Milford Asset Management which holds APN News & Media shares on behalf of clients.

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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