Can investors make a big profit on a Ten Network Holdings Limited takeover?

Can investors make big profits on a Ten Network Holdings Limited takeover?

This trade could have a big upside, with the downside risk potentially less.

Tom Richardson

Tom is a holder of the CFA Society of the UK administered Investment Management Certificate (IMC) and has more than a decade's professional experience in the investment management industry in Australia and the UK. Tom now works as a writer and editor for TMF Australia and has two easy to remember rules of investing he likes to follow. Avoid overpaying for growth stocks and avoid paying at all for stocks that are cheap for a reason. Tom prefers growth investing over value investing and says it's not rocket science, just avoid overpaying for the best returns.

Published July 21, 2014 5:44 pm AEST

When the going gets tough, many investors tend to get going on businesses in struggling sectors. However, contrarian investors can sometimes find themselves sitting on decent profits after a bout of merger and acquisition activity that comes about as the antidote to a sector's struggles. Witness the recent takeover of struggling department store David Jones Limited (ASX: DJS) by South African retailer Woolworths, or the proposed acquisition of Wotif.com Holdings Limited (ASX: WTF) by U.S. travel giant Expedia.

Shareholders in both companies were offered a substantial premium to the value of downtrodden shares at the time and will likely be more than happy to take the offer. Some will be underwater on their investment overall, but the luckier ones may crystalise big profits in a short-time period.

Another sector with hotting up consolidation prospects is the media sector, which includes operators such as Ten Network Holdings Limited (ASX: TEN). Ten currently sells for 28.5 cents having posted a series of disappointing results as its general entertainment programs struggle to attract viewers or strong advertising revenues. The company recently announced it expects total television revenues to be down 3.5%-4.5% in the full financial year, while costs will jump significantly after the company bet big on the Sochi Winter Olympics and soon to be aired Glasgow Commonwealth Games.

Ten may then be a takeover target for Rupert Murdoch's News Corp (ASX: NWS), or foreign bidders keen on the turnaround potential of the business. Shareholders buying the stock today could expect a substantial premium on the current valuation if a suitor acts on the basis that free-to-air television still has a profitable future.

Moreover, potential regulatory reforms to be enacted later in the year include the abolition of the reach rule banning free-to-air broadcasters from reaching more than 75% of the population. The's rule's abolition could mean a green light for a round of future mergers between large metropolitan broadcasters and regional networks. Indeed, Nine Entertainment Co Holdings Ltd (ASX: NEC) has previously been in talks with Southern Cross Media Group Ltd (ASX: SXL) about a potential match up.

While the dumping of the "two out of three" media control rule could trigger a tie up between Fairfax Media Limited (ASX: FXJ) and Seven West Media Ltd (ASX: SVW) or Nine Entertainment Company. In my opinion a takeover of Ten remains the most likely of all these scenarios and brave investors today may be sitting on big profits not long down the line. The trade looks to have a potential big upside, with downside risk potentially less. However, Ten's not the best bet, really you should consider these 3 under the radar resources tips for your portfolio.

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