In theory following the 'smart money' should make an investor money; conversely being 'late to the party' should seem like a recipe for losing money. This hasn't been the case when it comes to Ten Network Holdings Limited (ASX: TEN) however, in fact quite the opposite perhaps.
The Smart Money
The substantial shareholders list and board of directors reads much like the members of Australia's 'Rich List'. Given the billions of dollars they control they could well be described as the 'smart money'.
- James Packer got the ball rolling with a substantial investment in Ten.
- Lachlan Murdoch – the non-executive Chairman and also the son of Twenty-First Century Fox Inc (ASX: FOX) founder Rupert Murdoch. Murdoch Jr joined the board in concert with Mr Packer.
- Gina Rinehart – Australia's richest person – became a substantial holder and joined the board in late 2010 as well.
Late to the Party
According to filings, interests associated with Mr Packer purchased around 15% of Ten's outstanding shares at $1.50 in October 2010. Meanwhile a filing from interests associated with Ms Rinehart show an entry price around $1.50 as well.
Given the share price performance over the past three years, it's obvious that following the 'smart money' soon after they made their investments in Ten would have led to a significant capital loss. Today, investors who are three years late to the party can buy Ten at a much lower price, with the share price currently languishing at 35 cents.
The question is – was the 'smart money' right and did it just get its timing wrong? If the answer to that question is "yes" then now could be an opportune time to purchase stock.
What has changed?
In late December 2013 Ten's shareholders voted and approved the grant of security over substantial assets and share conversion rights to certain members of the 'smart money'. This decision allowed for Ten to enter into a new $200 million debt financing arrangement which importantly was "covenant-lite".
The rationale for this transaction was it improved the balance sheet funding structure of the company and allowed Ten to pursue its programming strategy without the distraction of managing its turnaround within the constraints of financial covenants.
Foolish takeaway
There are of course structural issues facing free-to-air television which makes accurately understanding the future dynamics of Ten difficult. These issues are not specific to Ten alone; they are also faced by Seven West Media Ltd (ASX: SWM) and Nine Entertainment Co Holdings Ltd (ASX: NEC) too. However, the market's concern over Ten's balance sheet and the industry headwinds may have led to the stock being oversold. With the balance sheet vastly improved and the share price knocked right down, now could be the time to take a closer look at Ten.
