Southern Cross poised to change channel

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Although the intentions of Southern Cross Media (SXL.AX) to merge with Nine Entertainment have become very clear in recent weeks, Southern Cross has stated that it will continue discussions with Ten Network Holdings (TEN.AX) over a new affiliation agreement.

On Monday, Hamish McLennan officially started as Ten’s new chief executive, with an aim to increase program ratings amongst older generations and stop focusing so much on programming for younger people. Ten’s poor ratings performance over the last few years however, has heavily impacted on its long-term affiliate, Southern Cross.

Expiring in June this year, the affiliation agreement between the two companies is looking more and more likely to end. Southern Cross’s half year reports to December 31 showed net profit after tax down 52%, whilst revenue was $327.68 million — down 10% from the same period last year. Such results have left the company desperate to find a new program supplier, and it seems they may be looking to their remote to change to channel Nine.

Following a review of the company’s affiliation with the Ten Network, conducted by Graeme Samuel, it was recommended that Southern Cross enter a merger with Nine, leading to discussions between the two companies beginning late last year.

However, this affiliation is only possible should the “reach rule” be abolished by parliament, which disallows any TV license holder from reaching more than 75% of the national population. Should the rule be lifted, Ten Network will need to find a new affiliate to remain competitive – potentially looking towards WIN Group or setting up its own affiliate. Similarly, we could see Seven West Media (SWM.AX) pair up with Prime Media Group (PRT.AX), which it currently owns 11% of.

Foolish takeaway

Recent news about the potential merger has seen Southern Cross’ share price soaring, up over 50% since the beginning of the year. Should the reach rule be abolished and the merger allowed to proceed, we should see even higher returns for Southern Cross shareholders, and a change to the entire media landscape.

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