Fairfax Media at 59% Discount Seen Ripe for Bid: Real M&A
The owner of the Sydney Morning Herald and the Australian Financial Review trades at 0.3 times its book value, the lowest among media companies worldwide with market capitalizations exceeding $1 billion, according to data compiled by Bloomberg. Even after Australia’s richest woman, Gina Rinehart, raised her stake to 13 percent, Fairfax is still trading close to its least expensive versus net asset value on record.
With Fairfax shares slumping 87 percent in the past five years as newspaper readers defected to the Internet and falling consumer spending curbed advertising, the company trades at a 59 percent discount to the A$3.3 billion ($3.3 billion) value of its six units, according to Royal Bank of Scotland Group Plc. The Sydney-based publisher, which controls New Zealand online auction site Trade Me Ltd. (TME), as well as four of Australia’s 10 biggest papers and the country’s top dating site, may now be cheap enough to attract leveraged buyout firms, Platypus Asset Management Pty and Tribeca Investment Partners Pty said.
“Clearly private equity would have interest in it,” said Prasad Patkar, who helps oversee the equivalent of $1 billion at Platypus in Sydney. “They’ve shown interest in a lot of things that can be broken up. The share price decline has probably been too aggressive.”
Brad Hatch, a Sydney-based spokesman for Fairfax, said in an e-mail that the company had no comment on the subject.
Fairfax takes its name from English immigrant John Fairfax, who bought the Sydney Morning Herald in 1841. It publishes more than 430 newspapers and magazines including the Dungog Chronicle and the Southern Highland News, according to the company’s annual report and website.
Earnings peaked in 2008 before Fairfax last year posted its biggest loss as advertising revenue dwindled. Sales are projected to decline for a fourth consecutive 12-month period in the year to June 2012, according to data compiled by Bloomberg.
After building a portfolio of hundreds of titles, Fairfax is now funding a traditional print business at a time when readers are switching to free Internet content.
At the same time, the advertising for jobs and homes that traditionally drove earnings at the Sydney Morning Herald and the Age in Melbourne are now on specialty websites such as Seek Ltd. (SEK) and the realestate.com.au unit of REA Group Ltd. (REA)
In the most recent six-month period, publishing sales dropped 8 percent, while digital revenue jumped 14 percent, Fairfax said Feb. 23.
Worth more than A$7.5 billion in 2007, Fairfax today rose for the first time in seven sessions, closing 1.7 percent higher at 59 Australian cents in Sydney. That gives the company a market capitalization of about A$1.4 billion, according to data compiled by Bloomberg. The S&P/ASX 200 index rose 1.3 percent.
The slump has left the share priced at just 0.3 times the value of Fairfax’s net assets, which totaled A$4.7 billion on Dec. 25. That’s the cheapest level since at least 1999, and compares with an average of 4.2 for media companies with market capitalizations of more than $1 billion, data compiled by Bloomberg yesterday show.
The valuation could make Fairfax attractive for a buyer willing to bet the company can offset declines in print revenue with online advertising gains, said Peter Esho, the Sydney-based chief market analyst at City Index Ltd., a London-based provider of trading services in bonds, stocks and commodities.
“It’s extremely cheap,” he said by telephone. “They do have some very dominant publications. They just haven’t found a way to monetize them. Anybody with a longer-term horizon, someone who could wait for that monetization to pan out, could be a buyer.”
Rinehart, the Australian mining magnate worth $18.6 billion according to the Bloomberg Billionaires Index, owns about 13 percent of Fairfax, the company said Feb. 3. She has also sought support from fellow investors for two board seats, according to the Australian newspaper. Rinehart told the Sydney Morning Herald last month that Fairfax needs to say how it will address its share-price drop and falling newspaper circulation.
Mark Bickerton, a Perth-based spokesman for Rinehart’s closely held Hancock Prospecting Pty, said by phone that he couldn’t make any comment on Fairfax.
The publisher’s 66 percent stake in Trade Me, the publicly traded Wellington-based company where New Zealanders can buy and sell anything from bicycles to boat engines, was worth NZ$1.02 billion ($786 million) at yesterday’s closing price. That’s the equivalent of about A$790 million, more than half Fairfax’s market value, according to data compiled by Bloomberg.
The most valuable Fairfax business, at A$1.38 billion, is Regional Media, publisher of titles such as the Cootamundra Herald and the Port Stephens Examiner, RBS said in a May 4 note. Those titles are typically local newspaper monopolies with little competition from online outlets.
Fairfax “could be an attraction for private equity but anyone willing to buy it would have to be looking for more than Trade Me,” said Sean Fenton, who oversees about A$900 million including Fairfax shares at Tribeca Investment in Sydney. “They need to be willing to manage that business through a transformation and hold it until the domestic economy looks better.”
The Reserve Bank of Australia on June 5 cut its benchmark interest rate by a quarter percentage point to 3.5 percent, the lowest since 2009, after consumer confidence stagnated near the worst level this year and Europe’s debt crisis deteriorated.
Australia’s economic outlook hasn’t deterred buyout firms. KKR & Co. approached Pacific Brands Ltd. (PBG), Australia’s biggest underwear maker, in January. TPG Capital in February offered to buy surfwear maker Billabong International Ltd. (BBG), one of only two consumer discretionary companies in Australia’s S&P/ASX 200 Index to post a bigger drop than Fairfax in the past five years.
Total advertising spending in Australia will accelerate for three straight years after shrinking in 2011, according to JPMorgan Chase & Co. Spending will rise 0.6 percent in 2012, 2.5 percent the following year and 2.7 percent in 2014, the New York-based bank said in a May 24 report. The largest gains will be online, with the biggest declines at newspapers, Jarrod McDonald, a Sydney-based analyst at JPMorgan, said.
In the U.S., billionaire Warren Buffett last month backed regional publishers when his Berkshire Hathaway Inc. (BRK/A) agreed to pay $142 million for most of Media General Inc. (MEG)’s newspapers, betting community-focused publications will weather an advertising slump. Berkshire on June 5 also disclosed a stake in Lee Enterprises Inc., the Davenport, Iowa-based owner of newspapers such as the St. Louis Post-Dispatch.
Fairfax’s current valuation still isn’t low enough to attract leveraged buyout firms, according to Tim Montague-Jones, senior equity analyst at Morningstar Inc. (MORN) The stock would have to sink to 30 cents before an LBO firm would make a bid, he said.
“Private equity would want a bigger margin of safety,” Sydney-based Montague-Jones said. “There’s obviously value in the parts in the business but it would take a brave person to go in there and rearrange it. It’s just too difficult to dismantle.”
While the Sydney Morning Herald website is “one of the jewels” of Fairfax, according to Montague-Jones, he said the cost of closing unwanted titles would be prohibitive.
Fairfax had A$5.3 billion of intangible assets, including mastheads and trade names, last fiscal year, the 2011 annual report shows. After Fairfax proposed shifting certain editorial roles to New Zealand, journalists at some Australian newspapers voted May 30 to strike in protest.
Still, Fairfax’s online assets such as Australian property website Domain, holiday rental site Stayz and dating service RSVP aren’t fully valued by investors, while newspaper printing costs, central to Fairfax’s recovery, are falling, according to Fraser McLeish, an analyst at RBS in Sydney.
“Fairfax still has some good growth assets,” he said. “The market is assuming they can’t get the costs down and they can’t monetize any of that. It is having some success in getting those costs down.”
In the six months ended Dec. 25, publishing expenses dropped 4 percent and online revenue rose to a record, accounting for 14 percent of total sales. Fairfax plans to cut A$170 million of costs over three years by sharing content across radio, newspapers and the web, and centralizing advertising sales activities.
Fairfax has assets that Rupert Murdoch’s News Corp. (NWSA), which controls 70 percent of Australia’s newspapers including the Daily Telegraph and The Australian, would covet, according to Platypus’s Patkar.
Stephen Browning, a Sydney-based spokesman for News Corp.’s Australian unit, said he doesn’t comment on mergers and acquisitions speculation.
Bloomberg LP, the parent of Bloomberg News, competes with News Corp. and Fairfax units in providing financial news and information.
“Would Rupert Murdoch like to own these assets?” said Patkar, in reference to Fairfax. “Absolutely. Would he be allowed? I’m not sure.”