The three shareholders in Foxtel, (Telstra, News and PBL), have decided to start running the urban Pay TV monopoly for cash after the attempt to merge with regional rival, Austar failed.

Foxtel had tried to snaffle Austar with an offer of between $1.85 and $1.90 a share but failed because the US cable TV magnate, John Malone and his Liberty Media wanted $2 a share for their 53% stake in Austar.

The merger would have cost Foxtel around $2.4 billion but there would have been significant cost savings: upwards of $200 million once the deal had been completed and the two businesses merged.

Austar has proceeded (subject to Tax Office approval) with a $300 million (23c a share) capital return to shareholders, which will benefit Malone by around $160 million. Austar has also started cutting costs, quitting an attempt to get into terrestrial broadband: it’s looking for savings of around $4 million a year.

Now, deep in the PBL profit announcement yesterday the revelation of a change of approach to running Foxtel:

The Foxtel Board of Directors recently adopted a guideline of refinancing its debt to maintain a debt to EBITDA ratio of approximately three times and to distribute its free cash flow, including amounts raised from refinancing debt, to shareholders.

That means the controlling shareholders have given up on expansion plans and plan to try and drag as much cash out of Foxtel as possible.

With that three to one ratio (i.e. debt will be three times earnings before interest, tax, depreciation and amortisation) Foxtel will substantially boost debt to allow the partners to withdraw cash.

With EBITDA of $237 million in 2007, Foxtel will lift borrowings to just over $700 million. If EBITDA hits $300 million this year, as expected, debt will rise to around $900 million and the three partners will share the freed up cash flow and money raised from the extra debt. PBL and News, with 25% apiece could see more than $50 million each from Foxtel this financial year.

In the 2007 year Foxtel earned a pre-tax profit of $76 million. PBL included an equity accounted profit of $17 million for the year, compared to a profit of $1 million in the last financial year.

These are accounting entries, what is planned for Foxtel this year is a distribution of real cash, the first in the Pay TV group’s history.

News and PBL have already been raking in tens of millions from their joint ownership of Premier Media group which controls Fox Sports.

The cash return at Foxtel will boost the valuation of Cons Media which will not have a major profit centre until it makes an acquisition. The cash from Foxtel will cover the cost of running the company.

But the result did include a dud: one that allowed James Packer to tighten his hold on PBL a couple of years ago. It’s the investment in Hoyts which was bought from the Packer company, Cons Press for $173 million in 2005 for 11.1 million PBL shares. West Australian Newspapers was the other partner (Ian Law, the current CEO of PBL Media did that deal when he was running WAN) and it paid $173 million in cash.

WAN wrote its stake down to $145 million and (a cut of $60 million) and yesterday PBL revealed a write down to $143 million in the value of its 50% of Hoyts. Both shares are on the market.

No sign of James Packer returning some of the 11.1 million shares from Cons Press to PBL for this dud related party transaction.

Shareholders approved it but that didn’t bless it. Chris Anderson was the lead independent PBL director on the Hoyts transaction who okayed the transaction. He became executive deputy chairman after the deal.