Acquisition by Austereo by Southern Cross Media Group Limited

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The acquisition by Austereo by Southern Cross Media Group Limited (‘SCM Group’) was announced on the 31st of January 2011 and was implemented by way of an off-market takeover offer for $2.05 per share for either cash or scrip consideration, or a mixture of cash and scrip consideration (Acquisition Announcement, 2011). The most important conditions of the offer were a 50.1% minimum acceptance of the offer by Austereo shareholders, ensuring that the deal would not be successful if SCM Group did not acquire a controlling stake, and ACCC and Australia Communication and esMedia Authority approval (Implementation Deed, 2011). Soon after the announcement of the takeover offer, the Directors of Austereo announced that they would unanimously recommend that Austereo shareholders accept the Offer in the absence of a superior proposal (Company Announcement, 2011).

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The rationale for the acquisition from SCM Group’s perspective is that the merged business will create a leading Australian media company. The merged company’s television and radio assets will have the ability to reach Australians in both regional and metropolitan areas (Acquisition Announcement, 2011). It also provides the opportunity for the merged company to offer premium content across a national platform (Bidder’s Statement, 2011). Both groups of shareholders will benefit from the economies of scale of the merged entity which provides strong opportunities for cost sharing and cash generation (Acquisition Announcement, 2011). The merged company will be able to benefit from the knowledge and expertise of both of the businesses to allow enhanced better access for advertisers to a broader audience, improved digital services for regional audiences and the opportunity for staff of both companies to share ideas and work across an expanded business (AFR, 2011).

SCM Group is Australia’s leading regional media provider reaching 95% of Australia’s population through 14 regional free-to-air television licences. With 68 commercial radio stations and close to 40 licence areas, SCM Group is the largest commercial radio network in Australia (Acquisition Announcement, 2011).

Prior to the takeover, Austereo was a leading Australian commercial radio broadcaster. Austereo operated two FM networks and one digital network: Today and Triple M, with stations in all mainland Australian state capital cities with two TV stations in Newcastle and Canberra, as well as digital radio brands including Radar Radio (Acquisition Announcement, 2011).

The operations of the two businesses are complementary because SCM Group is a regional media provider of TV and radio and Austero is an Australian commercial radio broadcaster. The business operations are similar and would allow for a pooling of employee talent, shared corporate, marketing costs, general and administrative costs, shared customers and consumers (AFR, 2011). Additionally, there was the potential to seek synergies and advertisement revenue by emphasising the merged entity’ larger national audience to advertisers (Bidder’s Statement, 2011). Value can be created by pursuing growth opportunities from the merger of the two complementary businesses. The merged entity will benefit from having a media reach to ~95 per cent of the Australia and enhanced economies of scale (AFR, 2011).

On 17 May 2011, SCM Group acquired 100% of the share capital of Austereo. The initial proposal offer of AU$2.05 per Austereo share had three alternatives:

  • $2.00 cash paid by SXL plus the $0.05 dividend announced by AEO
  • 0.95 SXL shares plus the $0.05 dividend
  • a combination of cash and SXL shares plus the $0.05 dividend

An additional $0.10 per AEO share will be paid to all accepting AEO shareholders if acceptances exceeded 90%.

Costs of combination at $723.7 million comprised $722.5 million cash payment and $1.2 million shares issued as consideration for the acquisition. In addition, as Austereo accounted for 50% interest in Radio Newcastle as investment and SCM Group has held 50% equity of the entity, SCM Group therefore gained 100% ownership of Radio Newcastle through the acquisition (Southern Cross Austereo, 2011).

Transaction costs are acquisition-related costs which described by AASB as costs including finder’s fees; professional and consulting fees such as advisory, legal, accounting, valuation fees; general administrative and registering costs etc. They are recognised as acquirer’s period expenses. (AASB, 2010) SCM Group’s Annual Report 2011 provided $6.3 million costs associated with the acquisition, recognised as an expense in other expenses. This figure can be cross-checked in the Statement of Comprehensive Income 2011 which stated “one off transaction costs $6.3 million.” (Southern Cross Austereo, 2011).

AASB 3 defines goodwill as “an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised” (AASB, 2010). Goodwill is calculated as acquisition price exceed fair value of net assets which were total assets less total liabilities. SCM Group’s 2011 annual report indicated that costs of combination were $723.7 million and fair value of net assets was $682.7 million. The difference of $41 million was recognised as goodwill, including $18.7 million from Radio Newcastle; a subsidiary of SCM Group through acquisition. This resulted in a business combination of goodwill at $59.7 million. Goodwill from the business combination reflected benefits from SCM Group’s future business growth and increased of market shares. They were not identified and recognised separately as intangible assets such as licence, patents and rights. Notes to the Financial Statements for year ended 2011 also provided SCM Group allocated goodwill to “cash-generating units and is not amortised but is tested at least annually for impairment.” (Southern Cross Austereo, 2011).

SCM Group’s annual report 2012 explained that valuation of Austereo acquisition was incomplete due to the acquisition date being so close to the 2011 financial year end. The initial accounts for Austereo as at 30 June 2011 provided annual reports on a provisional basis. SCM Group needed further recognising and finalising fair value of the assets and liabilities on acquisition as well as considering tax implications. After adjustments made in the 2012 year ended, goodwill from the acquisition reduced by $5.3 million to $35.7 million while, goodwill from Radio Newcastle increased by $1.4 million to $20.1 million. As a result, total goodwill arose on the business combination re-stated as $55.8 million in the annual report 2012 (Southern Cross Austereo, 2012).

There are two types of Accounting Standards that relevant to the additional disclosures requirement by Southern Cross Media. Firstly, AASB 3 Business Combinations amended incorporates IFRS 3 Business Combinations as issued and amended by the International Accounting Standards Board (IASB). SCM Group should disclose information that allows users/investors to evaluate the nature of its financial statements and financial effect of a business combination that occurs either: during the current reporting period; or after the end of the reporting period but before the financial statements are authorised for issue.

There are many disclosures required to meet the objective in paragraph 59 of AASB 3 including the acquisition date; the percentage of voting equity interests acquired; the primary reasons for the business combination and how SCM Group obtained control of the acquire. Other disclosure requirements include: qualitative description of the factors that make up the goodwill recognised; the acquisition-date fair value of the total consideration transferred; contingent consideration arrangements and indemnification assets; receivables; total amount of goodwill that is expected to be deductible for tax purposes. SCM Group should disclose information that allows stakeholders to evaluate the financial effects of adjustments recognised in the current reporting period of its financial statements (AASB 3, Disclosures, paragraphs 59-63).

Secondly, AASB 127 Separate Financial Statements is to prescribe the accounting and disclosure requirements for investments in its subsidiaries, associates and joint ventures when an entity prepares a separate financial statement which includes: the name of those investees; the principal place of business of those investees; and its proportion of the ownership interest held in those investees.

As mentioned previously, SCM Group acquired 100% of the share capital of Austereo, including gaining 100% ownership of Radio Newcastle in May 2011. As a result, Radio Newcastle has been consolidated as a subsidiary of SCM Group. Consistent with IFRS 3 Business Combinations, adjustments to the initial provisional accounting for the Austereo acquisition disclosed in this annual report have been recognised as if the final accounting for the business combination had been completed at the acquisition date. Disclosing information has been adjusted with the effect that is increase net profit after tax of $10.8 million related to the gain on disposal and acquisition of Radio Newcastle. Equity accounted investment in Radio Newcastle has been adjusted to reflect 50% of the fair market value of the business based on its current earnings and enterprise value implies more income based on the earnings multiple applicable in the acquisition of Austereo. Intangible assets are recognised in respect of radio and broadcasting licences, brand and a customer contract. Deferred tax assets and deferred tax liabilities have been adjusted to correctly reflect the differences between accounting and tax values as at the date of purchase/acquisition. In conclusion, the impact recognised the uplift in the value of the 50% investment in Radio Newcastle as below:

Southern Cross Austereo

Final fair value

Provisional fair value

recognised on

recognised on

acquisition

acquisition

$’000

$’000

Fair value of previously held 50% ownership interest

31,900

20,962

Equity accounted value of 50% ownership interest

-20,962

-20,962

Net gain recognised in profit and loss

10,938

0

Initial impact reported by the news was “SCM Group’s Austereo takeover bid riles investors” (Lara. S, 2011). The reaction of the stock price in this situation was predictable, usually the acquiring company’s stock will fall while the target company’s stock will rise. After the announcement of the acquisition of Austereo, the share price of SCM Group was affected and dropped. The share price dipped by ~12% after the announcement from $2.16 to $1.90, a total 50% share price decrease from the year 2011 to 2012 (Yahoo Finance, 2012).

The dip in share prices was largely due to the need to raise equity to help fund the acquisition, there by diluting the share price and stakes for current shareholders, resulting in shares worth less. There were also severe regulatory risks associated with the takeover transaction, such as prevention by the ACCC or being forced to sell radio stations in order to comply with anti-trust regulations. There was also a lot of speculation as management did not reveal the plans regarding how the merged company will be organised (Acquisition Announcement, 2011).

Usually in a takeover scenario, the acquirer’s share price will dip because of the premium for control of the target which perceivably can destroy some value. However, in this case, analysts considered the premium fair (AFR, 2011). The drop in the share price was less to do with an exorbitant premium which analysts considered fair and more to do with the dilutive effects of the equity capital raise to help finance the acquisition and the lack of transparency regarding key details of the acquisition.

Integration is one of the primary reasons for the takeovers, the purposes are simply to increase profits, increase market share and reduce competition. SCM Group’s takeover of Austereo included an acquisition of all assets like TV channels/TV programs and Radios. As a result of large market share, the acquisition also included a large pool of audience, a large area cover of the TV channels over Australia from the south to the north, and also many famous TV shows like ‘big brother’. This acquisition gained a majority of the market share and reduced one of the giant competitors in the TV entertainment industry.

Financial effects included SCM Group offering an attractive amount ~$741.3 million to acquire Austereo. SCM Group also agreed to pay a premium to shareholders of Austereo. After the acquisition, SCM Group will increase a $741.3 million and the premium as debts into their account. The large amount of debts will raise problems like short of liquidity and solvency. Short of liquidity will lead the company to insolvency or bankruptcy if the company cannot afford to pay their debts. Prior to the takeover, the solvency ratio was ~7%, compared to the ~10% afterwards, this shows there is more leverage in the business as debt was used to finance the acquisition.

Overall, the impact of the acquisition is still beneficial to SCM Group. Although SCM Group’s share price fell due to the acquisition, Austereo’s share price went up. The amount of $741 million is arguably fair for the integration, increase in large market share and assets. Reducing competitors will also be beneficial for the company and increase future profits.

References

  • Shoebridge, Neil, Australian Financial Review (‘AFR’), 29 March 2011, Factiva ‘Why did the share price drop’.
  • Southern Cross Media Group Limited, 31 January 2011, ‘Acquisition Announcement’, pages 13-14.

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