TX Australia Pty Ltd v Network Ten Pty Ltd; Network Ten Pty Ltd v TX Australia Pty Ltd

The PwC Report - covering letter

1. PwC submitted its report to TXA under cover of a letter of 19 January 2018. I will refer to it as the Covering Letter.
2. In that letter PwC stated: "Some matters relevant to the engagement Prior to entry into the engagement we identified two conditions to be met (our letter of 7 August 2017). Those conditions were: 1. Receipt of legal advice obtained by TXA on the appropriate interpretation to be placed upon the term 'price' in clause 10.2 of the Shareholders Agreement, which we would then use to undertake the valuation adopting a methodology that was consistent with that legal advice. 2. Receipt of information from you relevant to the application of the methodology, upon which we could rely for the purpose of the valuation. We mentioned at the time and subsequently that information as to the cost of any ongoing broadcasting services that would be provided to Ten on an arm's length basis would be relevant. As to the matters in 1 above, you advised us on 21 August 2017 that for the purpose of the valuation 'the price of a proportionate share' was to be determined by us applying Market Value (namely the amount which a willing and knowledgeable but not anxious purchaser would pay and a willing and knowledgeable but not anxious vendor would sell in accordance with the principles in the decision Spencer v The Commonwealth (1907) 5 CLR 418). We had understood this to reflect legal advice you had obtained. Only recently (your email of 30 November 2017) you have advised us that this was an assumption you wanted us to adopt, rather than being a reflection of any legal advice TXA may have received. As to the matters in 2 above, and as we have discussed, the nature of the future arrangements between Ten and TXA is a crucial element in any valuation. The current circumstances existing between TXA and Ten appear to be such that agreement as to those arrangements has not been reached as yet. As a result, by letter dated 20 November 2017 you instructed us to proceed on a particular basis as to ongoing arrangements. We queried whether this basis would reflect arm's length arrangements, following which you told us you were unable to confirm whether that would be the case. As a result, we have used the quote provided to ABC [to Australian Broadcasting Corporation] by TXA, because it represented the only available evidence of which we were aware of an arm's length arrangement involving TXA. We have also provided details of an outcome using your proxy as part of our sensitivity analysis. Engagement variation As a result of the two points above, we have not been able to provide a valuation which, in our view, satisfies the purpose of our original engagement letter. The valuation work we have been able to do, its outcomes and our approach is set out in this deliverable." (Emphasis added.)

The PwC Report

1. The PwC Report adopts an orthodox definition of market value. PwC assessed such value on a discounted cash flow basis after considering a range of alternative valuation methodologies. There is no dispute that PwC was correct to adopt this methodology. Nor would any such dispute be relevant: see [58] and [59] above.
2. Under the heading "[a]t a glance - our view" PwC stated: "Our valuation of Ten's share is based on a number of assumptions and represents one of what may be a number of possibilities". … "Valuation summary ● Given the unique nature of TXA's business we analysed the potential buyer pool and considered the various valuation outcomes. We considered that the main potential purchasers are a combined Seven and Nine consortium under the shareholding agreement or Ten or the holder of Ten's TV licence (potentially CBS). Discussion of our work on this aspect is set out in the Approach section. ● We considered what each potential purchaser would consider paying and possible outcomes, which we have summarised below. Seven and Nine: ● In the event Seven and Nine purchase the Shareholding we consider that there are two likely operating scenarios: i. Ten ceases to be a customer of TXA and therefore Seven and Nine will bear all the excess operating costs and capital expenditure. ii. Seven and Nine negotiate a long term commercial contract with Ten. ● Under the first scenario, given a current negative equity position of TXA no additional value would be received by Seven and Nine in holding additional shares in TXA. ● If a commercial contract was put in place with Ten as a customer, it is likely that Seven and Nine would be willing to pay for the incremental net present value (NPV) of this additional contract. Based on the fee proposal provided to ABC which is the only evidence provided of an arm's length arrangement for similar services ($7.3m for a period of 20 years) this would result in a value of $42.9m. ● On 20 November 2017 you advised us of an alternative arrangement of $3.2m per annum plus power costs recharged separately however you were not able to confirm that this reflected your estimate of an arm's length transaction. If an alternative arrangement was in fact agreed which more closely aligned with $3.2 per annum, it would result in a value of $15m. ● Note, as Ten's share of power costs has not been provided it has also not been included in the calculation and annual inflation has not been included. This is consistent with the ABC proposal. Ten or the holder of Ten's TV Licence: ● In the event Ten or the holder of Ten's TV licence had the opportunity to purchase the Shareholding, we consider that they would pay up to the amount it would cost them to procure the same service at an arm's length rate adjusted for any net negative equity positions. They would do this only in the circumstances that the current shareholders agreement remained in place. ● Based on the fee proposal provided to ABC, this would result in a value of $42.9m. ● Again, if the commercial arrangement was in line with the alternative arrangement you provided on 20 November 2017 of $3.2m per annum, it would result in a value outcome of $15m. ● We consider the most likely outcome to be that Ten or the holder of Ten's TV Licence would purchase the Shareholding or no transaction at all would occur. ● This report assumes that the commercial rate that would be charged to Ten would be in line with the ABC fee proposal. ● If the holder of Ten's TV licence acquires the share the current fee arrangements would be expected to remain intact. ● To the extent the commercial contract that is put in place is different, this would impact our valuation. We have performed a sensitivity analysis on the commercial contract arrangements to demonstrate the sensitivity of our value on this key assumption. This sensitivity addresses a range of values including values encompassed by the fee arrangement advised to us by you on 20 November 2017. Sensitivity analysis (AUD'000s) Contracted annual fee ($'000) Equity Value 994 (0) 2,000 6,838 4,000 20,433 6,000 34,028 7,313 42,953 8,000 47,624 10,000 61,219 12,000 74,814

Note: all values above assume no inflation for first 20 years consistent with ABC proposal". (Emphasis added.)

1. Later in the Report, under the heading "[p]otential scenarios and valuation outcomes" PwC expressed various "value outcomes" depending on a range of "[p]otential ownership structures" and "operating scenarios".
2. Relevantly, that part of the report reads as follows: "Seven 50%/Nine 50% (Seven and Nine purchase the holding) Seven/Nine only major users: Ten ceases to be a customer. Seven and Nine continue to be on a cost recovery basis This would occur if Ten was forced out and agreement was not reached on a fee that was considered acceptable to Ten. Seven and Nine would be required to cover costs and capex. Value outcome: $0"

(Emphasis in original.)

1. Later in the Report PwC stated: "Valuation of business 'as is' ● In order to initially assess the value of the business 'as is' we have utilised management's cash flow forecast and applied a discounted cash flow methodology. ● As there are third-party minority shareholders in Gold Coast Translators Pty Ltd (GCT) and Combined Translator Facilities Pty Ltd (CTF) we have separately assessed the MV implied by the income approach for each of the businesses (TXA, GCT and CTF of which TXA has a 75% shareholding) (refer to Appendix 3 for detailed calculations) in order to assess the enterprise value of TXA. ● We have then deducted net debt of $14.1m to determine the Equity Value of TXA. This consists of $15.5m of interest bearing debt housed entirely in TXA and $1.3m of cash, which excludes 25% of the cash held by GCT and CTF. ● The following pages set out the key valuation assumptions. ● Based on our analysis, there is currently a negative equity value due to the large proportions of debt. We estimate the value for the Shareholding to be negative $3.4m. We consider that there would be no value in the equity under this scenario."
2. Immediately following, PwC stated: "Valuation of business for Financial Purchaser ● As per our analysis we consider a financial purchaser would seek to buy the Shareholding in the event a long term contract was put in place with Ten at a commercial rate. … ● We consider this as an unlikely scenario as it would not be in the best interests of Seven and Nine for commercial arrangements to be changed and therefore they would likely purchase the shareholding to prevent this event occurring."
3. In appendix 3 to the Report, PwC prepared a "discounted cash flow analysis".
4. In that part of the Report PwC expressed the opinion that the market value of Ten's shareholding in TXA "as is (Ten retains its shareholding)" and if "Ten exists and does not use the services [of TXA]" as nil, in each case.
5. PwC continued: "Valuation of business for Seven and Nine ● As per our analysis we consider Seven and Nine would be willing to pay up to the value they would receive for the services on commercial terms from Ten providing the agreement was long term in nature. ● We have again estimated the commercial fee based on the ABC proposal reduced for the current estimated contributions by Ten and have assumed that amount paid would be reduced by the negative equity position under the 'as is' scenario. ● We did not include discounts for lack of marketability or control as it represents the cash flow uplift that Seven and Nine would receive. ● Under this scenario we estimate the value received by Seven and Nine by purchasing the Shareholding to be $42.9m."
6. I turn now to Ten's four points (see [85] above).

Did PwC specify two preconditions which have not been met?

1. Ten submits that PwC had specified two preconditions to their ability to make a determination as to a "price" for Ten's shares as at 30 June 2017, that neither precondition had been met, and that therefore PwC had not made any determination of price.
2. Ten points to the statement in PwC's letter of 7 August 2017 (see [90] above) that their ability to "undertake this work" would depend upon, first, "receiving legal advice on the appropriate interpretation to be placed upon the term 'price'" in cl 10.2 of the Shareholders Agreement, and second, receipt of information from TXA "relevant to the application of the methodology upon which [PwC] would rely" including information "as to the cost of any ongoing broadcasting services that would be provided to Ten on an arm's length basis".
3. As to the obtaining of legal advice, on 21 August 2017 TXA requested PwC to assume that "price" meant market value: see [91] above. The Engagement Letter and the PwC Report itself show that PwC did make this assumption for the purposes of the PwC Report.
4. In the Covering Letter, PwC said that it had understood that TXA had obtained legal advice about that matter. That may have been a reasonable assumption for PwC to make. But TXA did not say it had received such legal advice. In any event, as PwC stated in the Covering Letter, on 30 November 2017 TXA "advised [PwC] that this was an assumption [TXA] wanted [PwC] to adopt, rather than being a reflection of any legal advice TXA may have received".
5. I will deal later with the significance of PwC's adoption of the assumption. But I do not see PwC's 7 August 2017 statement that its ability to undertake this work was dependent upon legal advice being received, as amounting to an unfulfilled condition precedent to PwC making the determination requested.
6. Until 30 November 2017 PwC (wrongly it seems) assumed that TXA had received legal advice about that question. Once the true position emerged, PwC proceeded to produce the PwC Report.
7. I see no unfulfilled condition precedent.
8. As to PwC's second request concerning the cost of any ongoing broadcasting services to be provided to Ten, PwC reiterated in the Covering Letter that "the nature of the future arrangements between Ten and TXA is a crucial element in any evaluation".
9. PwC's point was that, assuming Ten was no longer a shareholder of TXA, the amount (if any) it agreed to pay TXA for the provision of the transmission services would affect the value of its shares in TXA as at 30 June 2017.
10. It is common ground that there was no long term commercial contract in place between TXA and Ten at 30 June 2017.
11. PwC recorded that fact in the Covering Letter when it stated: "The current circumstances existing between TXA and Ten appear to be such that agreement as to those arrangements has not been reached as yet".
12. Indeed, on 24 November 2017 Ten's solicitors wrote to TXA: "No agreement for broadcasting services has been discussed by Ten and TXA, let alone agreed".
13. For that reason, on 20 November 2017 TXA wrote to PwC with an estimate of "the most likely annual fee" that Ten might pay TXA for the transmission services should Ten seek, and TXA agree to provide, them. The estimate was $3.2 million per year plus GST.
14. As PwC records in the Covering Letter, it did not use that figure in its calculation because TXA was not able to confirm that that figure "reflect[ed] arm's-length arrangements". Instead, PwC used a quotation that TXA had evidently given the Australian Broadcasting Corporation for the provision of transmission services "because it represented the only available evidence of which [PwC was] aware of an arm's length arrangement involving TXA".
15. I discuss the significance of this below. The point for present purposes is that PwC was not specifying a condition precedent to its ability to express an opinion as to the price of Ten shares. It was explaining why, and on what basis, it ultimately expressed a range of opinions rather than the "single point estimate" that it had foreshadowed in the Engagement Letter; see [123] to [130] below.
16. For these reasons, my conclusion is that there were no unfulfilled conditions precedent.

Did PwC put its report forward as a "determination"?

1. Ten submits that PwC did not put forward the PwC Report "as a determination".
2. In that regard, Ten relies upon the statement made by PwC at the conclusion of the Covering Letter that: "Engagement variation As a result of the two points above, we have not been able to provide a valuation which, in our view, satisfies the purpose of our original engagement letter. The valuation work we have been able to do, its outcomes and our approach is set out in this deliverable."
3. PwC did not there state that it had been unable to "provide a valuation" of the kind called for by cl 10.2(b)(ii) of the Shareholders Agreement.
4. What it said was that it had not been able to provide a valuation which "satisfies the purpose of our original engagement letter".
5. As I have mentioned, PwC had stated in the Engagement Letter that there is "no indisputable single value and we normally express our conclusions as falling within a likely range" but that: "…to comply with the requirements of this engagement, we will provide you with a single point estimate, being a figure within that likely range".
6. I read PwC's statement at [124] above to mean that, notwithstanding what it had said in the Engagement Letter, PwC did not feel able to provide a "single point estimate".
7. Hence, PwC concluded the Covering Letter: "The valuation we have been able to do, its outcomes and our approach, is set out in this [Report]."
8. I do not read that statement as signifying that PwC had not made a determination in the PwC Report itself.
9. Analysis of the PwC Report makes clear that it did.

Did PwC "determine" a price for Ten's shares?

1. Clause 10.2(b)(ii) of the Shareholders Agreement requires PwC to determine "a price" for Ten's shares.
2. Ten submits that a determination of "a price" should be construed to mean "a single price for those shares". Further, that "from reading the PwC Report, however, there is no objective indication of any single figure which PwC has decided as the price of Ten's shares".
3. It is true that PwC expressed a number of outcomes as to the market value of Ten's shares depending on what it described as various "scenarios".
4. The first scenario is on the basis of TXA "as is". That is, if "Ten ceases to be a customer of TXA and therefore Seven and Nine will bear all the excess operating costs and capital expenditures" of TXA. PwC opined that in that circumstance "given a current negative equity position of TXA no additional value would be received by Seven and Nine in holding the additional shares in TXA" (see [98] above at the fourth bullet point) and that Ten's shares would have no value (for example see [100] above).
5. PwC did consider an alternative "scenario"; namely "if a commercial contract was put in place with Ten as a customer". In that event PwC opined that Ten's shares would have a market value of $42.9 million (assuming it paid $7.3 million per annum for 20 years; the ABC figure see [98] above) or $15 million (assuming it paid $3.2 million per annum for 20 years; TXA's estimate of "the most likely annual fee", see [94] above).
6. I do not think it follows from the fact that PwC put forward a range of "scenarios" that it failed to reach a "determination".
7. The relevant determination will, as it were, self-select depending on the facts.
8. It is common ground that the first scenario reflects the facts; namely, the "as is" position.
9. On my reading of the PwC Report, that is the relevant "determination" that PwC made.

Did PwC wrongly accept instructions from TXA to determine price by reference to market value?

1. As I have described, PwC sought guidance from TXA as to the meaning of "price" in the Shareholders Agreement. Initially it requested that legal advice be obtained as to the meaning of "price" in the Shareholders Agreement. In response, TXA requested PwC to assume that price meant market value (see [91] above).
2. Shortly thereafter, TXA emphasised that that request was meant to "assist" PwC but that if PwC was "of the view that any different methodology ought to apply, PwC should adopt that methodology with appropriate reasoning". PwC made clear in the Engagement Letter that "[TXA] have informed us that Market Value is the basis we should apply" (see [92] and [93] above).
3. Consistently with the Engagement Letter, PwC stated in the Covering Letter that it had proceeded upon that basis.
4. It was for PwC to select the methodology it would apply in determining "a price". It sought guidance from TXA about that matter. It was not bound to accept that advice. Any error PwC made in adopting TXA's suggestion cannot provide a basis to impugn its determination: see [58] and [59] above.
5. In any event, in my opinion PwC adopted the correct methodology.

Fourth issue - is cl 10.2(b)(ii) void for uncertainty?

1. Ten submits, although without great enthusiasm in oral address, that because cl 10.2(b)(ii) contains no formula and specifies no criteria to enable PwC to carry out the task of determining "a price", PwC was left to determine "price" in a "contractual vacuum" and that because an "essential machinery provision" was lacking the clause was uncertain; State of New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503; [2002] NSWSC 178 at [70] (Einstein J).
2. But here there is no "contractual vacuum". The parties have left it to PwC to determine the methodology to be adopted.
3. In any event, as Nine submits, the mere fact that there is a dispute about the meaning of "price" in cl 10.2(b)(ii) does not render the clause void for uncertainty. The clause is not completely devoid of meaning.
4. For the reasons I have outlined, my opinion is that "price" should, in the context in which it appears, be construed as meaning "market value". So read there can be no suggestion that cl 10.2(b)(ii) is void for uncertainty.

Conclusion

1. For those reasons I propose to make a declaration to the effect sought by TXA; namely that TXA is required by cll 9 and 10 of the Shareholders Agreement to register the transfer of the shares of Ten in TXA to the Seven and Nine in their relevant proportions.
2. I will hear the parties as to costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 May 2018