Nine Entertainment IPO taps into Australia's passion for cricket

SYDNEY Thu Dec 5, 2013 4:05pm EST

Australian gambling tycoon James Packer claps during day two of the Commonwealth Business Forum in Colombo November 13, 2013. REUTERS/Dinuka Liyanawatte

Australian gambling tycoon James Packer claps during day two of the Commonwealth Business Forum in Colombo November 13, 2013.

Credit: Reuters/Dinuka Liyanawatte

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SYDNEY (Reuters) - Investors in broadcaster Nine Entertainment Co Pty Ltd IPO-NEL.AX are hoping Friday's listing on the Australian stock exchange taps into a national passion: cricket.

The A$631 million ($569 million) initial public offering coincides with the second Test match of the biennial Ashes series between Australia and England, a 131-year-old sporting rivalry that is a ratings blockbuster for Nine.

Cricket is the jewel in Nine's crown and investors will be betting the former No. 1 ranked station in Australia's free-to-air television market can make gains on rival Seven Network (SWM.AX) and beat the challenges facing old media.

Nine has had a rocky time since former owner James Packer, son of media mogul Kerry Packer, sold to private equity at the peak of the buyout boom in two deals in 2006-2008, ending up in the hands of two U.S. hedge funds.

But ratings have stabilized, it's winning this year in the most important audience demographic for advertisers - peak night viewing for adults aged 16 to 54 - and with the Ashes in full swing it will be hoping for a viewing boost.

"What's their outlook? Very good. They've got momentum that neither of their fully commercial competitors have," said Steve Allen, managing director of media consultancy Fusion Strategy.

The IPO, which priced at the bottom of the marketing range, gave Nine a market capitalization of A$1.9 billion, while the holdings of Oaktree Capital Group (OAK.N) and Apollo Global Management (APO.N) will fall to 14 percent and 22 percent respectively.

CRICKET COUP

Major sports events like the Ashes and the National Rugby League (NRL), for which Nine has partial rights, are key not only for the revenue they generate but for advertising upcoming TV shows as traditional networks struggle to retain viewers amid a significant shift to online viewing.

Nine has been linked to cricket since Kerry Packer upended the game in the 1970s by signing the world's best players to his rival World Series Cricket format in a bid to secure TV rights to the game.

The station earlier this year paid a record A$450 million ($411 million) to outbid Ten Network Holdings Ltd (TEN.AX) for the five-year international cricket broadcasting rights.

"It's a big part of ... the appeal of the network to the audience," said Luke Sinclair, an investment manager at Karara Capital.

"Not only does it attract a good audience but it provides a platform to promote the rest of their schedule," Sinclair added. "It's probably not terribly profitable in itself, but it's about attracting viewers that are otherwise hard to get."

Ratings for the first Ashes test match last month peaked at 2.5 million viewers, a sizeable chunk of Australia's 23 million-strong population.

COMPETITIVE CHALLENGE

Nine said in its prospectus that sports rights were critical to drumming up revenue across its combined television, events and digital businesses.

Nine Network, the company's free-to-air television business, is expected to contribute more than 70 percent of profits in 2014. The rest will come largely from staging live sports and music events and its digital division.

Ten has made no secret under Chairman Lachlan Murdoch, the son of media baron Rupert Murdoch, of challenging for sports rights. It picked up the domestic Twenty20 Big Bash League cricket for A$100 million and will likely take another shot at international cricket in 2018.

Nine is also under challenge from pay television.

Pay-TV operator Foxtel, owned 50/50 by News Corporation (NWSA.O) and Telstra (TLS.AX), already has rights to broadcast much of the Australian Football League (AFL) and the NRL, the country's two most popular sports.

It is calling on the Australian government to relax strict laws that prevent sports such as the Ashes, US Open, Olympics and Wimbledon from being shown exclusively on Pay-TV.

Fusion's Allen said he did not expect the government would change the laws as this would be hugely unpopular with the electorate as many consumers still see Pay TV as expensive.

Nevertheless, free-to-air broadcasting revenue is likely to fall by an annualized 3.8 percent over the five-years through 2017/18 to A$6.7 billion, according to research group IBISWorld. Pay TV revenue, in contrast, is expected to increase an annualized 3.3 percent over the same period to A$4 billion.

($1 = 1.1092 Australian dollars)

(Editing by Richard Pullin)

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