The Kerry Stokes charm offensive came to Melbourne yesterday and produced immediate dividends for the controversial billionaire in a Terry McCrann comment endorsing his bizarre Seven-WesTrac merger deal.

The $2 billion related party transaction has been roundly criticised and is likely to be voted down by institutional investors yet McCrann now reckons Seven Network minority shareholders might have to renegotiate the deal to pay even more.

Why so? Because Seven shares have climbed from $7.36 to $7.81 since the deal was announced.

What a load of rubbish. In an environment where cash is king, Seven’s minority shareholders do not need this deal? The share price would have risen far more substantially if Stokes had deployed $150 million of Seven’s $1 billion in cash on a 10% buyback.

History suggests that people who buys assets from Stokes often pay too much. Look no further than those wood ducks at KKR.

Similarly, Stokes hasn’t exactly set the world on fire with his re-deployment of KKR’s $2 billion. Plenty has been lost in share market investments such as Telstra and the WA News play in particular looked ego-driven with Seven shareholders still wearing a paper loss of more than $100 million.

At one level the Seven share price might be trending higher on the belief Stokes will be forced to renegotiate the WesTrac price down and relief that at least Seven’s cash will be deployed into a solid business with good growth prospects.

There are two other key points around debt-laden private equity structures, which need to be emphasised. At some point the KKR joint venture in the television and media assets will need to be recapitalised but the listed Stokes vehicle will have less capacity to achieve this because it is being loaded up with the $1 billion private debt that sits inside WesTrac.

And why does WesTrac find itself with too much debt? Well, growing the Caterpillar franchises in China, NSW and WA is a capital intensive business.

The other reason is the rarely mentioned private equity takeover of Coates Hire.

Stokes owns 66% of the listed National Hire, which in turn owns 46.1% of Coates Hire. However, as the latest National Hire results reveal, profits plunged by 82% to just $2.776 million in the December half and Coates is teetering under net-debt of $1.635 billion.

Stokes is no different from James Packer in that he found himself stuck with too much private debt in the middle of the greatest credit crisis since the Great Depression.

The $2.1 billion takeover of Coates Hire at the very top of the market in late 2007 was clearly a big mistake and this exposure will be rolled into the listed conglomerate if Seven’s shareholders approve the deal. Just like the KKR joint venture in media, Seven’s shareholders would then have to decide whether to inject equity into National Hire so it can help recapitalise Coates Hire’s debt-laden balance sheet along with private equity partner Carlyle.

At the end of the day there is no logical reason for Seven’s shareholders to be dragged into these issues. The most sensible way to resolve Kerry Stokes’ private debt problem would be through a partial float of WesTrac. Seven’s minority shareholders could be given priority allocations.

The whole deal seems eerily reminiscent of Rupert Murdoch’s 2004 reshuffle when he dumped those old media newspaper assets in Queensland on News Corp shareholders in a breathtaking $3 billion related party transaction. Those same assets would struggle to fetch $1.5 billion if sold today.

Just because Kerry Stokes wants to pay down some private debt without triggering a big tax bill through a capital return of Seven’s cash doesn’t mean that institutional investors should be dragged along to create a hotch-potch conglomerate.

And it is ironic in the extreme that Stokes is doing all these breathtaking acrobatics to pay down private debt in the most tax effective way at a time when Australia’s free-to-air networks have just received a huge $250 million tax cut on their licence fees.

  • Listen to Stephen Mayne and The Australian’s media writer James Chessell debate the Stokes deal on 702 ABC Sydney yesterday.