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    Thursday, December 04, 2008


    Seven Networks (SEV)

    Seven Networks (SEV) is the parent company of a number of entities including a joint ownership (47%) of the Channel Seven TV network. SEV has the following assets (per share based on 222M shares) as at 30 June:

    * 1.2Bn in cash (5.45 per share)
    * 1.2Bn in equities including 20% of WAN (5.45)
    * 800M in Seven Media Group (the Channel Seven JV) (3.64)
    * 25M in property (.11)
    * Telys (prefered equity described below) (-2.25)

    As of 19th September they gave an update on their equity portfolio and cash
    * 1.3Bn in cash (5.91)
    * 1.1Bn in equities (4.97)

    There has been some discussion in the press about Seven Media Group (SMG) being essentially worthless because of their debt. They have about 2bn in debt and then effectively 1.6bn in equity split between KKR and SEV. They do not pass dividends back to SVN because all of their, currently depressed, earnings go to pay off the 2bn in debt.

    SMG may be worth zero. In SEV's last filing before spinning out SMG they had 1.8Bn in assets of which maybe 1.4Bn are attributable to SMG. Net of SMG's debt, which is obviously NOT recourse to SEV, there may not any asset value. That 1.4Bn is at cost, though so property etc may be worth much more. There also hasn't been any dividends paid from SMG to SEV because all the cash is used to pay interest. It seems likely that there is still some value in SMG but a lot less than the $800M at cost.

    Adding the most recent numbers up you get about 8.74 excluding SMG or 12.38 including it as valued on the balance sheet.

    They have announced and are conducting a share buyback. They are repurchasing up to 40M shares and seem to be doing so below $6. Assuming that they repurchase 40M shares at $6 with the most recent equity prices you get:
    * 0.96Bn in cash (5.33 per share)
    * 1.1Bn in equities including 20% of WAN (6.08)
    * 800M in Seven Media Group (the Channel Seven JV) (4.44)
    * 25M in property (.11)
    * Telys (prefered equity described below) (-2.76)

    Which would be 8.79 without SMG or 13.24 including it.

    SEV has no debt and isn't liable for the debts of those companies that it invests in.

    There are also preferred shares (TELYS) outstanding trading as SEVPC. They are trading at 76.1c on the dollar and yield 4.564% on face value or 6% if purchased today and they're fully franked which is the equivalent 8.6% interest with no franking. They step up by 2.5% in May 2010 and are perpetual so they don't have to be redeemed. They have a 27% yield to maturity if they were redeemed on May 2010. The YTM is reduced to 20% if they were redeemed in May 2011. Of course they may never be redeemed in which case based on today's interest rates you'd get 10% before tax. The $496M of SEVPC outstanding could easily be redeemed with SEV's balance sheet though I expect it's not in the best interests of shareholders to do so at the moment. The SEVPC money is effectively paying for the share buyback.

    Book value in July 2007 was 10.31 a share and the stock traded above that and as high as 14.46 (for one day) before the current retreat. SEV pays a 6.2% franked dividend while you wait.

    Kerry Stokes is the major shareholder in SEV and he is likely to deploy the cash at rates of return better than cash. As he holds around half the shares outstanding you should expect him to act in the interests of share holders! There is an excellent interview in the Australian with Stokes where he clearly lays out, in April 08, that he expects media values to fall substantially and then he will become a buyer.

    In buying SEV you get around $8.79 in cash and publicly traded equities, net of the TELYS, for $5.50 as of 4th December. Adding in a token amount for SMG you get $9.35. The equity portfolio likely owns shares that in turn are substantially undervalued. You also get the opportunity to participate in the upside if SMG's situation improves. Finally you get Kerry Stokes to find cheap media companies during a crisis with the 900M he deliberately kept for such an occasion -- all for free!
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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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