From M-Star:We cut our fair value estimate on Southern Cross to...

From M-Star:

We cut our fair value estimate on Southern Cross to AUD 1.20 per share, from AUD 1.70.

The adjustment reflects ARN Media and Anchorage's revised offer of 0.87 shares in a reconstituted ARN New Co, from 0.75 prior, plus AUD 0.296 cash for each Southern Cross share. This equates to AUD 1.00 per Southern Cross share at current ARN Media prices, a proposal we ascribe a 75% probability of success. Weighting this and the 25% probability the deal falls through, in which case reverting to our stand-alone AUD 1.70 valuation, we arrive at our new fair value estimate.

There are two reasons why we assign such a high probability the revised proposal goes ahead.

First, shareholders occupying at least 26%, and likely much more, of the register permitted to vote, support the revised proposal. Unhappy with Southern Cross' subpar performance in recent years, these shareholders don’t even want to entertain the possibility of current management delivering on its improvement plans. This is a mistake, based on our stand-alone intrinsic assessment. But we understand the shareholders' frustration. We ourselves have been vocal regarding the perennial cost issues. For example, see our note on May 3, 2023 titled "Southern Cross: Watch the Pennies and the Dollars Should Follow, as Should Stock Price."

Second, the no-moat-rated Southern Cross board has effectively capitulated and all but endorsed the revised proposal. While there is more due diligence to come and the thorny issue of the assets and value of ARN New Co remains, the resolve to fight is fading and the fast-tracked retirement of the chairman and a director reflects that.

With Southern Cross' track record of underperformance as its battle cry and with shareholder support in its pocket, the consortium may still tweak both the valuation of ARN New Co and the details of its final offer. But the sensible thing to do is to allow the Southern Cross board to save face, and for the consortium to quickly firm up the offer.