$1bn media deal under spotlight

By KARYN SCHERER

The New Zealand component of the proposed merger between Herald publisher Wilson & Horton and Australian media company APN News & Media was showcased to Australian analysts in Auckland yesterday.

The number-crunchers were invited to New Zealand to see what APN News & Media is buying.

Although the $1 billion deal is essentially a restructuring exercise for Dublin-based Independent News & Media, which controls both companies, some analysts remain concerned about the effect of the merger on APN's level of debt.

A separate transaction allowing Wilson & Horton to raise $1.1 billion by selling and then licensing back intangible assets has also raised eyebrows in this country.

The convoluted deal involves W&H selling its mastheads - the value of its brands such as the New Zealand Herald - to APN in a separate transaction involving merchant bank JP Morgan.

JP Morgan has agreed to give Wilson & Horton $1.1 billion for the mastheads, before selling them to another Independent News & Media subsidiary. APN will in turn buy that subsidiary.

In return for its role in the deal, JP Morgan will receive royalties of $105 million a year for an initial period of seven years.

The transaction has effectively reduced the amount APN has had to pay out for W&H from $1.5 billion to $985 million, while reducing its Irish parent's debt.

Wilson & Horton's chief financial officer, Phil Eustace, said the stock exchange's market surveillance panel had indicated it was happy with the process followed.

Mr Eustace said the main reason for the transaction was to provide funding which would help APN to acquire the New Zealand company.

Although the company has cleared the transaction with its own lawyers, accountancy experts have described the transaction as unusual.

Alan Robb, a senior accountancy lecturer at Canterbury University, said it appeared to have been designed to cut the company's tax bill and to "tidy up" its balance sheet.

Mr Robb said he was unaware of other firms selling and leasing back intangible assets.

Victoria University accountancy professor Don Trow also said he had not come across such a transaction before.

"I can only guess that what they were trying to do was keep the borrowing out of the balance sheet, so they didn't upset their borrowings from other people."

Professor Trow said he was not aware of other companies using a similar tactic, but would not be surprised if it became fashionable.

"This is a first for me, but these things happen. All of a sudden it will spread like wildfire."

An independent report on the merger by Andersen Corporate Finance notes it will mean that APN has negative cashflows next year.

While it has set up a debt facility with JP Morgan, it must make licence payments for at least seven years.

Although there has been talk of a tilt by APN at its bigger media rival John Fairfax Holdings, the report notes that APN's debt remains a concern.

Given the size of the Wilson & Horton acquisition, the masthead transaction, new convertible unsecured note interest and a need to pay dividends on the expanded share capital, the acquisition "could constrain APN from undertaking other acquisitions involving a significant amount of debt in the near term", it says.

Independent News & Media finance director James Parkinson said yesterday that he was unconcerned about the level of debt, which remained investment grade.

He agreed the deal would "tidy up" the Irish company's balance sheet while providing "slightly more effective" funding for APN.

Mr Parkinson said he believed the deal made "strategic sense" for both companies.

As well as the Herald, W&H owns regional and community newspapers, a commercial printer and a third of the country's largest radio company, the Radio Network.