I've highlighted my concerns over the potential dilutive effect of the CPS's. It seems I'm not alone. From the AFR today:
"It's the issue which is scaring some fund managers away from investing in Seven West Media shares, and it has nothing to do with the advertising market or overnight ratings.
In just over a year the television-to-magazines giant will be unable to pay its 12¢ dividends or indeed return any capital to shareholders.
Unless, that is, it has wriggled out of a ticklish financial position with its largest shareholder, and chairman, Kerry Stokes.
It has to do so, and it surely will, but the question investors are asking is, at what cost to the company's balance sheet and at what risk to its minority shareholders?
Mr Stokes owns 69 per cent of Seven Group Holdings, which owns just over 35 per cent of Seven West Media.
Seven Group Holdings (which we'll refer to here as Mr Stokes for simplicity's sake) has a poison pill that effectively prevents a third party from mounting a successful takeover of Seven West Media. It allows Mr Stokes to maintain a stake of no less than 29.6 per cent in the company.
The poison pill dates back to the company's formation in 2011 via the takeover by Mr Stokes' West Australian Newspapers of Seven Media Group.
At that time Mr Stokes issued himself (SGH) $250 million worth of convertible preference shares in the form of a five-year note that capitalises interest at just over 7 per cent. At the end of five years, roughly $350 million is owed to Mr Stokes.
And that trigger point arrives on April 20, 2016, which is the fifth anniversary of the issue of the convertible preference shares.
Conscious that investors are anxious about the matter, Seven West Media CEO Tim Worner told investors at the company's results presentation last month that it is "actively reviewing options" for how to deal with the issue.
"We're aware of it, we're working through it and we expect to resolve it within the year," said Mr Worner, adding: "Our board is committed to finding the best outcome for shareholders."
Mr Worner and the rest of Seven West Media's management have two basic options. They can either pay Mr Stokes' SGH the $350 million or choose to covert the $350 million into stock at the current share price.
But at today's lowly levels – the share price closed on Friday at $1.42 down from more than $2 eight months ago – such a conversion would be heavily dilutive and lift Mr Stokes' shareholding in the company to around 49 per cent of the shares.
That is an unthinkable prospect for other shareholders in the company (which would need to give their approval for Mr Stokes to bypass the creep provisions that would otherwise prevent him increasing his shareholding by more than 3 per cent every six months without mounting a full takeover).
So instead, the company – which, like Fairfax Media, owner of The Australian Financial Review/Business Day, is unpopular with some investors because of its exposure to print assets – needs to work out a way of refinancing the $350 million that's owed.
Seven West Media carried $1 billion of net debt at December 31, according to its half-year report and accounts, equivalent to 2.3 times its earnings before interest, tax, depreciation and amortisation.
Raising $350 million would raise the company's net debt to ebitda to about 3.5 times current forecasts of circa-$400 million for full-year 2016 ebitda.
Thet would be getting rather close to the company's banking covenants, which allow it have a leverage ratio no higher than 4 before being in breach.
Analysts already factor the CPS into their diluted earnings-per-share forecasts – but some fund managers say privately that the looming uncertainty has put them off investing in the company.
Another option for Mr Worner, which would also need shareholder approval, would be to postpone conversion of the shares for another three years – and put them on the never-never.
But according to Seven West Media's annual report, the shares would begin to capitalise interest at more than 9 per cent after April 20, next year.
It's another complex detail for Seven West Media's team of shrewd executives and advisers to get their heads around.
There is some talk in investor circles that a solution could be arrived at by the full-year results in August and put to shareholders at the time of the annual meeting in November.
For now, however, the company says it is "maintaining a polite silence" on the matter."
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