http://www.theaustralian.com.au/business/wall-street-journal/tels...

http://www.theaustralian.com.au/business/wall-street-journal/telstra-the-weak-link-in-foxtels-bid-for-pay-tv-play-austar/story-fnay3vxj-1226210010272
============================================


Telstra the weak link in Foxtel's bid for pay-TV play Austar
BY: GILLIAN TAN From: The Wall Street Journal November 30, 2011 10:54AM
Increase Text Size
Decrease Text Size
Print

AS outlined by Deal Journal Australia on November 14, the odds on the Australian Competition & Consumer Commission approving Foxtel?s acquisition of regional pay television operator Austar don?t look good.

Alarm bells were ringing well before the ACCC delayed again its decision on whether to sign off on the $1.9 billion deal. Some hedge funds were already betting against it.

With the stock trading at a 32 per cent discount to Foxtel’s bid price of $1.52 a share, JPMorgan executive director of specialist equities sales Sujit Dey thinks Foxtel wouldn’t have requested more time if it thought the deal would be approved.

"Clearly, Foxtel sees a material risk of being rejected and therefore it is attempting to provide the ACCC with more information as a final attempt to gain clearance," he said in a note to clients.

Austar welcomed the suspension on the timeline of the ACCC’s decision, viewing the action as an indicator discussions between Foxtel and the regulator are continuing.


But Mr Dey has courage in his conviction that the ACCC will block this transaction due to the threat that Telstra, which owns 50 per cent of Foxtel, will use its power to prevent Austar from offering a competing broadband service in a post-NBN world.

Though it is possible that Foxtel has decided to offer undertakings to lessen competition, Mr Dey believes the only options would be for Telstra to give away its veto right on any strategic Foxtel decision or sell down its 50 per cent stake, both of which aren't viable.

It may seem obvious that Foxtel will take this matter to court if push comes to shove, but it's more than likely Austar will dive back towards its 52-week low of 87 cents.

That’s why Mr Dey, who is recommending that clients go short, notes that event-driven funds are not expected to hold a position in the stock if the matter is taken to court due to the lengthy precedent set by Metcash.

Given the last ACCC extension was for a time period of almost three months, a final ruling may not be reached until mid-February, and if approved, a Foreign Investment Review Board decision may only come in mid-2012.

If the Federal Court today rejects the ACCC’s appeal against the approval of Metcash’s $215 million acquisition of Franklins stores from South Africa’s Pick n Pay Holdings - which the competition watchdog blocked citing a monopolistic hold of the wholesale food market - Austar could rally.

If it does, Mr Dey reckons it presents yet another attractive level to short the stock.