Ten Network Holdings Limited (“TEN”) - Episode Two – How Short is a Piece of String

TEN, as reported in its half-year results announced last week, has decreased the book value of its television licence by AUD214 million.  Also in the announcement, TEN flagged a trading loss for the current financial year of AUD25 million to AUD30 million (EBITDA).

Equity markets responded negatively to this news and since the announcement, the share price has fallen from AUD0.44 to AUD0.24 – representing a fall of 45%.  The share trading volumes have been exceptionally high – disgruntled investors are, apparently, voting with their feet.

The enterprise value of TEN is now approximately AUD120 million, using the net debt amount disclosed by TEN and the current market capitalisation. 

Value and value creation is a fundamental element of financial markets and a key driver for participants in those markets.

Value is difficult to assess.  Arguably, it is as much art as it is science.

The principle is clear – the value of an asset today reflects the expected benefit of receiving cash flows from that asset in the future.  And there are well established methods used to assess value.

But the future is uncertain and this means any assessment of value today involves risk associated with the expected quantum and timing of projected future cash flows.

Within this context, spare a thought for the Board of TEN and the difficulties it faces in assessing the value of the most significant asset owned by the company – its television licence.  The Board has the unenviable task of ensuring that the balance sheet of the company reliably reflects the value of its assets.

Hence the impairment provision announced last week of AUD214 million.  This followed similar provisions in the previous two financial years of AUD135 million (F2016) and AUD253 million (F2015). 

It is worth noting that the TEN annual report shows the television licence cost was AUD1,078  million.  After allowance for the most recent impairment provision, the carrying value of the television licence would appear to be AUD133 million.

The Preliminary Final Report (Appendix D) submitted by TEN provides some interesting detail on matters relevant to value.

The broadcasting licence was valued using discounted cash flow analysis.  Key inputs were 6.5 years of forecasts (prepared by management), the expected benefits of operational and structural reforms (prepared by management) and a long-term cash flow growth rate of 1% (prepared by management).

The methodology is sound but there might be differences of opinion on the key inputs. 

Given the ongoing disruption to Free to Air advertising revenue from competing new media, it is difficult to accept a long-term cash flow growth rate of 1%. 

As disclosed by TEN, the valuation is sensitive to several inputs including revenue and the cost of capital to the company.  Relatively small variances in these inputs change the value significantly.

The assumption for cost of capital is 10.5%.  It would be interesting to see the basis of this estimate especially given the share price performance of the company and whether or not any adjustments have been made to the cost of debt given the existence of third-party guarantees on the bank loan.

And it would be fascinating to see just what the management forecasts are for the next 6.5 years.

Clearly, a more cautious set of key input assumptions would dramatically reduce the resultant value.

Ultimately, the market is the final arbiter of value – the worth of the television licence is the price a buyer is willing to pay.

And this requires the presence of a willing buyer for a television licence.  Perhaps a rare beast in the corporate jungle of today.

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