Why Telstra Won't Buy ConsMedia

So why is this seemingly sensible move so unlikely?

Reason One: The broker thinks that no member of the triumvirate will be able to consolidate the operations and earnings. Why? Under the current shareholding arrangement and built into the structure of FOXTEL, the broker thinks there is a provision that precludes any individual shareholder claiming control through acquisition of another shareholder.

Reason Two: Either way, the broker doesn't see Telstra as a likely buyer. Sure, admits JP Morgan, Telstra would love to increase its share in FOXTEL to a point where it could consolidate the company's financials. This would improve Telstra's growth profile, increase its leverage to higher growth Pay TV industry, and integrate better FOXTEL into its evolving content offering. But, based on the above, it is unlikely that even a full acquisition of ConsMedia would constitute the necessary control.

Reason Three: The broker sees News Corp as the more natural buyer, as it would be able to extract far more value from such a deal. News has management appointees in both FOXTEL and FOX SPORTS, owns the FOX brand, has considerably more expertise in the industry and is able to make a very positive contribution to programming arrangements.

In short, if any one of the three were likely to play a gambit to take control of FOXTEL, it would be Rupert and News, not Sol and Telstra.

That said, Consolidated Media still appears to be in a pretty good place, with the FNArena Sentiment Indicator sitting at 0.9. Only JP Morgan is Neutral, with six more sitting at Buy.

Credit Suisse, who reaffirmed its Buy just yesterday, notes that the company is in a much better position since CVC Asia Pacific injected a further $335m in equity into PBL Media, effectively diluting Consolidated Media's holding down to 0.074% from 25%.

The broker sees this as cementing the company as a purer pay-TV play and also makes it more attractive to suitors, as the dilution removes the current regulatory limitations to another television proprietor making a bid. With comments like that, why would ConsMedia even consider letting go of its FOXTEL stake?

The only other broker in the FNArena database to make a recent comment on the stock is Merrill Lynch. The broker notes the move away from PBL Media was a good one, as Merrills has little hope for PBL's survival even if debt covenants are relaxed. Even if PBL Media were to go the way of the dinosaurs, the broker would be surprised if James Packer was interested in getting back in even at a bargain basement price.

Over the last twelve months the shares have traded between $1.65 to $4.58 and just after lunch today, shares were down 2c at $1.90. This is a 44% discount to the consensus target price of $2.72 in the FNArena database.