TWO of Seven Network's largest independent shareholders say they will support the merger of the television network and Kerry Stokes's privately owned Caterpillar products dealer WesTrac after extracting better terms for the deal.
Ausbil Dexia and Perennial Value, who together represent 28.1 per cent of shares in the Seven Network not owned by Mr Stokes's private company, Australian Capital Equity (ACE), have agreed to support the merger at Seven's April 20 shareholders meeting, Seven said.
In the event WesTrac fails to meet its forecast earnings before interest, tax, depreciation and amortisation (EBITDA) for the 2011 financial year, Seven said ACE would cancel 15 million of the 115 million shares it was due to receive as part of the merger.
"The agreement provides earnings downside protection to non-ACE affiliated shareholders and reflects ACE's confidence in the underlying earnings growth of WesTrac," Seven said in a statement.
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"Ausbil Dexia and Perennial Value, whose shares represent approximately 28.1 per cent of non-ACE affiliated shareholders in Seven, have indicated that, in view of these developments, they will vote in favour of the proposed scheme."
Ausbil Dexia chief executive Paul Xiradis said he was "pleased to have been able to negotiate a downside protection mechanism for the benefit of all Seven minority shareholders".
"The fact that ACE has agreed to put part of its consideration at risk has assisted us in reaching a decision to support the merger,'' Mr Xiradis said.
"Notwithstanding this protection, we are confident that the quality and earnings leverage of the WesTrac business will deliver a great long term outcome for investors.''
Perennial Value managing director John Murray said there had been many "lengthy and frank discussions"with ACE before agreeing to the downside protection mechanism for minority shareholders.
"We had reservations on the terms in the absence of this ACE commitment,'' Mr Murray said.
"Capital preservation is always a key issue for Perennial Value and we now have much greater comfort with the protection mechanism.
"If WesTrac doesn't achieve the targeted profit level, then ACE is out of pocket to the tune of $130 million."
Both Ausbil Dexia and Perennial Value also said they welcomed Seven's efforts to accelerate its board renewal program.
Seven recently announced that it had appointed Egon Zehnder International to help advise on increasing the number of independent directors from three to five.
Mr Stokes, who is executive chairman of Seven and ACE, said WesTrac was a "great company with excellent management and opportunities for growth.
"We are extremely confident about its prospects," Mr Stokes said.
"As a result, we are happy to demonstrate our level of confidence by standing behind WesTrac's future earnings."
Seven said the independent expert confirmed that the "fair and reasonable" opinion on the share scheme was not affected by today's announcement and "therefore, is in the best interests of shareholders".
The Kerry Stokes-chaired media group surprised the market in February when it announced the deal with Perth-based Caterpillar products dealer WesTrac.
WesTrac is owned by by Mr Stokes's private holding company, ACE.
If the proposal is approved, Mr Stokes would end up with 67.9 per cent of the new company - to be called Seven Group Holdings (SGH) - up from his current 48.7 per cent.
Mr Stokes cannot vote on the proposal at the April 20 meeting.
If WesTrac fails to meet its earnings target and the 15 million shares are cancelled, Mr Stokes's interest in SGH would reduce to 66.2 per cent.
The deal has attracted criticism from corporate governance advisory firms.
Glass, Lewis & Co and RiskMetrics Australia advised Seven Network shareholders last week to reject the deal, saying it is not compelling and its value to investors is questionable.
RiskMetrics warned in a report that the deal "will also give minority shareholders exposure to the risks associated with exposure to the commodities cycle as well as the risks associated with operating in China".
Glass, Lewis and Co said the strategic rationale was "shaky", adding that the "value being offered to shareholders through this merger appears uncertain".
On Friday, fund manager Mackenzie Cundill, which owns 1.6 per cent of Seven said it would back the deal.
"We've dotted our I's and crossed our T's and we like what we see," Mackenzie's David Tiley told The Australian on April 9.
Seven Network holds a 47 per cent stake in Seven Media Group, which is the joint venture with private equity firm Kohlberg Kravis and Roberts (KKR) that holds the broadcast TV stations and Pacific Magazines stable and 50 per cent of online venture Yahoo!7.
The company's other media assets include a 22 per cent stake in James Packer's Consolidated Media Holdings (which owns half of Fox Sports and 25 per cent of Foxtel) and 23 per cent of West Australian Newspapers Holdings.
Seven had net cash of $1.04 billion at the end of the first half of fiscal 2010, a portion of which may be used to repay a WesTrac $600 million loan facility as part of the overall transaction.
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