Debt Down, Equity Up, Control Tighter

“In the years that followed he shuffled the deck of his assets in a series of big, complex, related-party transactions. The effect, in every case, was that the debt ended up further away from Stokes’ private interests, while his control over the assets was tightened. In all this the independent directors of his public companies – including Dulcie Boling, who had once been Murdoch’s nominee, and Peter Ritchie, the former head of McDonald’s Australia – raised no public objection.”

“‘Shock and awe’ is how one commentator described the announcement made by the Seven Network in February 2010.16 In theory the board of the company had, ever since the Kohlberg Kravis Roberts deal, been searching the world for good investments. Instead, much of the money had been used to buy back shares in the company itself, which had increased Stokes’ control. More had been spent on Consolidated Media Holdings and West Australian Newspapers. Now, the company announced, it had decided that the best way to spend its cash was to buy WesTrac from Stokes’ private company, ACE. Under the deal the Seven Network would pay $1 billion in shares for WesTrac, and take on the company’s $1 billion in debt, using $600 million of the remaining cash in the company to pay it down. The new merged company, Seven Group Holdings, would own the Seven Media Group with Kohlberg Kravis Roberts. It would be a conglomerate, bearing the Seven name but with little to do with the original business. Stokes would own 68 per cent of it. Once again, the equity moved closer to Stokes, and the debt – accrued by WesTrac during its fast expansion in New South Wales and China – further away. One investment adviser service described the situation pithily. ‘So after three years of searching high and low, the directors [of the Seven Network] have come to the conclusion that the very best investment opportunity is the acquisition of WesTrac.’ Under the heading ‘Sarcastic Remark Warning’, the service’s newsletter said, ‘The new combined media investment and heavy earthmoving company will be renamed Seven Group Holdings Limited, presumably a reference to the seven seas sailed by independent directors in their search for investment opportunities before stumbling onto the perfect one in their boss’s backyard.’”