After taking half a dozen pot shots at the proposed Seven-WesTrac merger over the past 10 days, a feisty reaction was finally generated from “Camp Seven” after yesterday’s Crikey story.

The Camp Stokes road show swung through Melbourne yesterday but there was no attempt to make contact with Crikey or the shareholder activist who has gone half a dozen rounds with the former billionaire at various AGMs over the years.

Former billionaire, you ask? Well, that’s the considered opinion of Forbes magazine, which released its latest Australian rich list yesterday and said the following about the man they now value at only $US780 million:

“Some of our members took a beating. Kerry Stokes, a former billionaire, now ranks only No. 22. In February Stokes announced plans to merge his Seven Network media company and Caterpillar dealer WesTrac, at the same time revealing privately held WesTrac’s heftier than expected debt load of $US900 million.”

While those Caterpillar franchises do clearly produce strong cash flows, the debt pile is a concern. As The Australian’s John Durie pointed out last week, Stokes is using the deal to extract a $95 million private dividend from WesTrac before the merger proceeds. Why does he need it? Is it partly because his private company is guaranteeing the value of the 66% stake in National Hire, which is being folded into the enlarged public company?

In terms of squaring the ledger with yesterday’s Crikey story, I’m happy to acknowledge those “wood ducks” at KKR are indeed the world’s most successful private equity firm over the past 30 years and Seven’s TV business is performing well.  And sure, a loss of $100 million at WA News isn’t too bad given the GFC.

However, another issue that should not be overlooked is the way Stokes is treating the investors who stumped up $500 million to buy Seven’s hybrid security known as Telys 3, which traded under the code SEVPC.

This is what Eureka Report commentator Jim Stening wrote last Friday:

Investors in the SEVPC will be offered an opportunity to invest in a new hybrid the Telys 4, issued by the new holding company, on similar terms to the existing security. The new hybrid will become perpetual on the step-up date of May 31, 2010, and pay a margin of 4.75% over the bank bill swap rate (BBSW) from the current rate of 2.50% over.

The investors will get to vote on the deal, but if they reject it they will be stuck with the existing security, which wouldn’t have the dividend stopper restrictions against the holding company. This means they are effectively being railroaded into accepting the new deal.

There will be a lot of disappointed SEVPC investors out there. Most would have been expecting Seven to use its surplus cash to redeem this hybrid on the step-up date of May 31, whereas they are now being switched into what is effectively a perpetual security. Unsurprisingly, the security price has fallen approximately 7% to levels of below $90.

It’s all very well for Seven’s cheerleaders to claim the market is endorsing the deal because the ordinary shares have jumped 5% to $7.77 since it was announced on February 22, adding $78 million to its market capitalisation.

But the market value of the hybrids has fallen 5% over the same period, reducing their collective worth by $25 million.

The All Ordinaries has risen 2% over the same period so there just isn’t a case to be made that the market has strongly endorsed this $2 billion related party deal.

Kerry Stokes is not a substantial holder of the hybrids, a non-voting instrument that doesn’t appear on the Seven Network balance sheet as a liability but would have soaked up $500 million of Seven’s cash had they been redeemed at the face value of $100 on May 31 as many investors expected.

Once the hybrid was redeemed, Seven’s cash would have been down to just $550 million and with Stokes owning 48% of the business, a capital return that generated a big tax bill wouldn’t have made much of a dent in tackling the excessive $US900 million private debt sitting inside WesTrac. Hence, we’ve got the current proposal on the table.