KEY POINTS:
The private equity bullrush among Australian corporates is already having a major impact on the A$30 billion ($33.5 billion) media and communications sector with one of the first leveraged buyouts to be done last year - Texas Pacific's A$1.4 billion takeover of department store chain Myer - just
dumping a host of major Australian media groups from its 2007 expenditure plans.
The worry for the Australian media sector now is that the long line-up of private equity based buyouts that are in the pipeline could put a serious dampener on their growth prospects over the next two years.
What media owners and communications companies really don't want is another bunch of Graeme Harts emerging this year. While Hart certainly made a quid stripping Goodman Fielder to the bone, breaking it up and selling off various divisions, he unleashed big cuts to his media and marketing budgets. While the short-term slashing worked for the financial markets, Hart's brands and their consumer goodwill were starting to decline, with media group revenues.
Nestle's top brass now privately acknowledge the impact of Hart's cost-cutting after they purchased the Uncle Toby's brand from him last year - the Swiss food group is pouring huge amounts back into advertising and marketing to rebuild what they call "brand equity".
For Australia's media owners, the dearth of Nestle-type companies in this market and the proliferation of private equity plays is starting to worry them. If a majority of private-equity-backed managers take Hart's route, they will feel plenty of margin pain.
Certainly Myer's new management regime has played hardball with media groups for 2007. The retailer has dumped the Packer-controlled Nine Network from its media schedule, mainly because it wouldn't play on price. Myer has also dumped Fairfax Media in favour of a cut-price contract with News Ltd newspapers and magazines around the country.
And on Wednesday, Myer's boss Bernie Brookes confirmed he had just done the same thing to the radio sector - only two radio groups will now get the retailer's money.
Myer observers say the group is looking for cost savings of at least 10 per cent and any supplier not willing to bow will get the boot.
Myer's defenders don't deny the retailer is looking for cost efficiencies but they argue the new owners also want to invest in the business and think longer term than the previous management team under Coles Myer ownership.
They point to the recent four-year deal signing up Australia's former Miss Universe, Jennifer Hawkins, as a case in point. Hawkins is now the face of Myer and such a long-term contract would have never been done under the old regime.
"They're certainly going to be more consistent going to market than in the past," says one executive close to the retailer. "If you look at the Jennifer Hawkins deal, that would never have happened previously. It's a real sign they're tying themselves to a longer-term communications and branding strategy."
And it's this notion of managing for the short or long term which has media minds fretting.
Kevin Luscombe, a former adman, current board director of APN News & Media (which owns the Herald), and chairman of Melbourne advisory outfit Growth Solutions Group, has been engaged by several private equity firms of late - he won't name names - and he raises some interesting points about their challenges.
Luscombe says the best of the three types of private equity firms will prove top-shelf company managers - those looking to build the businesses they buy. The other two, however, could well spell danger: those looking to buy, cut costs and sell again quickly and those looking for a "bolt-on" acquisition to build scale with another asset.
"The private equity people can do all the financial modelling in the world but increasingly they have to find out more about the culture of the organisation and recognise they need to look to the market beyond," says Luscombe, who also sits on the board of Cameron O'Reilly's investment play, Bayard Capital.
"It's amazing how many private equity people look at the business this year and maybe next year's P&L [profit and loss], ebitda and upcoming capital expenditure, but do not get in the helicopter and say where is this market going? Where are consumers going? What are retailers up to in this market? It's going to be very interesting in two years when all of these [private equity] owners want to sell again."
Indeed. And you can bet media owners will be hoping for a few more Nestles to come in and spend up again.