OPINION:If APN cannot be sold, INM will have to find another way to pay down its debts, writes John McManus

IT'S HARD to divine the true significance of Sir Anthony O'Reilly putting his Australian media interest up for sale.

Just quite what place APN occupies in the INM corporate heart is not all that clear, but without a doubt it is a part of the business for which O'Reilly has a particular fondness.

It was the group's first successful foray abroad, and instrumental in its transformation from an Irish newspaper publisher to an international media group.

O'Reilly was central to the deal in more ways than one, as his children's entitlement to Australian citizenship - his former wife is Australian - allowed the group to get around restrictions on foreign ownership of the Australian media.

It is also out of character for a man who is not noted as a seller of assets to dispose of something that he has been as closely involved with as APN. Indeed, if there is a criticism of O'Reilly in recent years, it is that he sticks with businesses long after he should have cut and run, Waterford Wedgwood being a case in point.

This analysis casts the disposal of the group's stake in APN as a class of a fire sale - the objective being to rapidly deleverage the business, which is facing serious problems on various fronts.

The INM version of what is going on is somewhat more prosaic - their jumping-off point being that rather than being active sellers they are responding to unsolicited approaches for the APN stake.

A disposal is also not out of tune with the medium-term group strategy, which included a failed leveraged buyout of APN a year ago.

Deleveraging and the release of cash were significant attractions for INM in that deal, and remain attractive.

By disengaging from APN now, INM could more than halve its debt to around €600 million, according to the company. In addition, the reduction in the annual interest bill would mean the disposal is more or less earnings neutral, says INM.

The final box ticked by the disposal, from an INM strategy point of view, is that it would free up resources to invest further in markets such as India and Indonesia, where the company has already established bridgeheads.

So which is it? Fire sale or opportunistic disposal?

There is no doubt that INM debts are an issue for the company. As Citi points out in its research note earlier this month, "the news that INM was considering selling its 39.1% stake in APN News Media came as a positive surprise since concerns on leverage have weighed on stock performance in recent weeks".

They also point out that there is a double effect in that the disposal means that APN's debt will no longer be consolidated into INM's accounts.

Over the years, the consolidation of APN into the INM accounts has served to make the company look bigger and stronger than it actually was, but in the current climate the consolidation is a liability.

And, crucially, any disposal will be completed ahead of the May 2009 deadline for the redemption of a €300 million bond.

Citi also take the view that the company will have to continue to reduce its borrowings in the coming months, even if it disposes of its APN stake. This will involve reducing the dividend and curtailing expansion.

There are also a couple of unanswered questions which might help to put the proposal in some perspective.

The first is the rather nebulous timeframe that is suggested for the disposal. If, as we have been told, there are a number of creditable expressions of interest, then a deal might be expected sooner rather than later.

There is plenty of speculation in the Australian press about who might be interested, but as yet no buyer, and no one expects a deal before the end of the year.

But the counter-argument here is that any disposal of INM's stake in APN could trigger a full bid for the business and, as a result, it is something that has to proceed in a measured fashion.

This leads to the other question, which is what would happen if it turns out not to be possible to engineer a sale of APN. This cannot be discounted, as the APN board showed last year when it put the kibosh on the leveraged buyout.

If this happens, INM will have to find another way to pay down its debts. And, while other disposals are possible, the prospect of a need for a rights issue cannot be discounted.

And that is something INM would want to avoid, as it could significantly alter the balance of power between O'Reilly and Denis O'Brien, who owns 26 per cent of the group and has made no secret of his ambition to wrest control.

The relative financial fire-power of the two men could then become a decisive factor in determining whether or not they can avoid dilution, or even increase their stake.

Your view on that informs how desperate you think INM is to dispose of its interest in APN.

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