MediaWorks' receivership highlights the risks of excessive leverage.
It also shows that financial institutions may not learn from past mistakes as a bank that was badly burnt by TV3's first receivership was also a lender to the company's highly leveraged private equity structure.
But the big question is, why was MediaWorks placed in receivership when the current restructuring appears to be fairly similar to the company's 2009 recapitalisation?
Has the latest receivership been solely driven by MediaWorks' desire to avoid paying $22 million to the IRD?
TV3 Network, which was incorporated in October 1987, was New Zealand's first commercial television operator.
It went to air on November 28, 1989 and listed on the NZX seven days later after an IPO at $2.50 a share. NBC, the giant US network, had a 14.9 per cent shareholding; remaining shares were held by domestic institutions, companies and individuals.
There was a 15 per cent overseas ownership cap on broadcasting companies at the time. The company struggled to compete against a revitalised TVNZ and was placed into receivership by Westpac on May 2, 1990.
Its share price briefly traded above the $2.50-a-share IPO price but it had dropped below 10c by mid-1990, just before the company was delisted.
TV3 continued to broadcast while in receivership as Westpac converted a large amount of its loans to equity. The Government lifted the foreign ownership cap from 15 per cent to 49 per cent in 1991 in response to TV3's problems and CanWest, the huge Winnipeg-based media group, bought a 20 per cent shareholding in December 1991.
After the foreign ownership cap was removed, CanWest bought a further 48 per cent of TV3 from Westpac in April 1997 and the remaining 32 per cent later that year.
Meanwhile, it began accumulating New Zealand radio assets in 1997 when it purchased More FM. Three years later, it bought a 72 per cent stake in the NZX-listed RadioWorks New Zealand, acquiring the remaining 28 per cent in January 2001.
Steven Joyce, now Minister of Economic Development, was RadioWorks' managing director at the time of the CanWest acquisition.
TV3 relisted on the domestic sharemarket in July 2004 after CanWest sold a 30 per cent stake in MediaWorks to New Zealand investors at $1.53 a share.
The prospectus showed that the radio operations, which generated 66 per cent of the company's operating earnings, were more profitable than television, which accounted for 56 per cent of revenue but only 34 per cent of operating earnings.
But the prospectus predicted a sharp rise in television profitability - as did the original prospectus 15 years earlier.
This time the company was more successful as the television and radio operations both exceeded prospectus forecasts.
On May 8, 2007 - 16 days before the NZX hit its pre-global financial crisis high - Ironbridge Capital announced that its fully-owned subsidiary HT Media had agreed to buy 70 per cent of MediaWorks from CanWest at $2.43 a share.
Ironbridge, established four years earlier, was a Sydney-based manager of private equity funds which had already acquired two New Zealand companies - backpacker accommodation operator ACB and waste disposal company EnviroWaste.
Under the Takeovers Code, it was obliged to make a full takeover offer for MediaWorks at $2.43 a share.
The bid was only partially successful, and Ironbridge ended up with 82.6 per cent - short of the 90 per cent required to move to compulsory acquisition.
The major holdout was Brook Asset Management, which refused to sell its 8.7 per cent holding.
Two months later, Ironbridge made a second offer at $2.68 a share, valuing MediaWorks at $608 million. This bid was successful and the private equity firm ended up with 100 per cent of MediaWorks.
Private equity is a high-risk investment strategy that involves a huge amount of leverage. If private equity bought a $1 million residential property it would probably provide only $50,000 in equity and borrow the remaining $950,000. This strategy can be hugely successful because the equity component would soar from $50,000 to $250,000 if the value of the property increased from $1 million to $1.2 million.
Conversely, private equity would lose all its equity if the value of the house fell from $1 million to $900,000.
The table (right) shows how MediaWorks' private equity owners transformed the company from a reasonably conservatively geared entity to a highly leveraged one.
Total debt went from $165 million before the takeover to $769.2 million under Ironbridge, and interest costs soared from $13.8 million in 2006/7 to $92.8 million the following year. This excludes $14 million of interest capitalised on loan notes.
The initial senior facility for Ironbridge in 2007 was provided by seven banks - Commonwealth Bank of Australia, Westpac, BNZ, Rabobank, Bank of Scotland, ABN AMRO and Royal Bank of Scotland.
Westpac came back for a second bite after being badly mauled by the 1990 receivership.
MediaWorks was restructured in mid-2009 when $266.6 million of loan notes and B preference shares were effectively written off.
(These loan notes and B preference shares are included in the total debt figures for 2007/8 and 2008/09 years in the table.)
Unfortunately, information on private equity entities is limited, and the last available MediaWorks accounts are for the 2010/11 year.
But behind the scenes there were several changes and conflicts.
TPG Capital, a US hedge fund, purchased CBA's debt at around 70c per $1 of loans and lobbied Ironbridge to restructure MediaWorks.
Other private equity funds also bought debt from the banks at a discount, and overseas media reports indicated that the relationship between TPG, these other equity funds and Ironbridge was tense.
But MediaWorks' high leverage was unsustainable and it was placed in receivership this week. It appears that most of the banks will have their loans converted into equity and will end up in the same situation as Westpac in the 1990 TV3 receivership.
But why has the company been placed in receivership when the latest restructuring is reasonably similar to the mid-2009 recapitalisation which did not involve receivership?
The obvious conclusion is that it was done to avoid paying $22 million to the IRD.
The MediaWorks saga shows the high-risk nature of leveraged private equity acquisitions, although these private equity funds invest in a large number of companies and one total write-off can be more than outweighed by several spectacular successes in a portfolio.
Ironbridge's purchase was also badly timed because it came just before the global financial crisis, which had a devastating effect on advertising revenue.
The MediaWorks story also shows how willing banks are to fund these highly geared structures.
It would take a brave person to bet against the suggestion than TV3 will relist on the NZX within the next few years with Westpac as its main lender.
The footnote to this story is that CanWest was given bankruptcy protection in 2009 as it struggled under a C$3.9 billion debt mountain.
Debt was swapped for equity and the original shareholders ended up owning only 2.3 per cent of the new CanWest.
The clear message from MediaWorks and CanWest is that excessive leverage can destroy investment returns.
• Brian Gaynor is an executive director of Milford Asset Management.