Fairfax shares dipped further yesterday after their falls of near 11% on Monday and over 8% last Friday, thanks to the departure of the company’s would be private equity suitors from the US.
The shares ended steady on 98 cents – 28 cents under the most recent high of $1.26 hit in May during the heady days of a contested bid for the company from TPG and Hellman and Friedman. The shares fell as low as 95 cents.
Now for the next round of speculation and Fairfax CEO, Greg Hywood set that in running yesterday when he raised the prospect of the company playing the role of a consolidator in any new round of ownership changes – that’s if the current ownership laws are changed by Federal Parliament.
But all that tells us is that some people in business are condemned to relive history by ignoring the mistakes of the past. And there is no better example of that than the Australian media and Fairfax Media in particular.
Not content with blowing up billions of dollars in value (along with the likes of Seven West Media, Nine Entertainment in its various guises, Southern Cross, News Corp and of course, the daddy of them all, the Ten Network), Fairfax CEO Greg Hywood has stepped up and wants to be a player.
According to a report in Fairfax’s Australian Financial Review yesterday, Hywood says his company is now a prime player in any industry consolidation that might result from media law changes in Canberra. He is ignoring the real lesson from the rejection of Fairfax by US private equity groups, TPG and Hellman and Friedman – there is little of value in your Fairfax’s balance sheet outside of Domain and it obviously isn’t as valuable as Fairfax thinks.
The share prices of Australia’s shrinking media sector have been held mostly aloft by the chimera of consolidation and law change. In Fairfax’s case that was tried and the company was found wanting by two would be suitors. Its shares jumped 11% over the year (a gain that was slashed on the final day of the financial year with that 8% plus slump). They lost 11% on Monday after its suitors went home.
News Corp shares rose more than 22% in the year to June, but that all occurred in the June half year thanks to a 17% rise in the shares of its biggest asset, REA Group, the bigger rival to Fairfax’s Domain.
Nine shares were up 31% because it is seen as both a buyer and a seller, and also a beneficiary of Ten’s collapse. Seven West Media though saw its shares slump 31% because no one but Kerry Stokes wants it. And while Southern Cross was an early riser, when Nine walked away in 2016, its shares have fallen sharply and could only manage a rise of 0.8% in the year to June.
In Fairfax’s case that includes the company’s big hope for the future, the Domain property listings business, part of which will now be floated off later this year which will help hide the growing flood of red ink from the company’s newspapers and radio in Australia and NZ. In the AFR story on Tuesday (http://www.afr.com/business/media-and-marketing/publishing/fairfax-media-ceo-greg-hywood-confident-in-future-after-private-equity-walks-20170703-gx3odj) was quoted as saying:
“I think Fairfax is, if the laws change, in an extremely good position to shape any consolidation outcome," Mr Hywood said. "I can’t say more than that. But, if you look at the range of assets we have, the strength of assets we have, the market power our assets have, we’re in a very strong position to shape post-legislative outcomes. I think there are more opportunities with legislative change, but there’s still opportunity without it."
"If you look at our market cap [$2.3 billion], our very low debt levels, the strength of the mastheads, the strength of Domain – there’s not many media businesses that have a growth business like Domain sitting at its core. I think we’re in really good shape," Mr Hywood said.
"We’ve got an incredibly strong base of shareholders who’ve been with us for quite a long time and have been delivered really good returns. They were delighted at the Domain separation and have been very supportive of that. They would expect us to go through the process of due diligence if we’ve got these indicative bids, but they’ve been very supportive of the position we’ve taken."
But the reality is that each time there is a media consolidation period offered by changes in Federal government policy substantial amounts of money are lost by companies and their shareholders.
Ten lost over $1 billion thanks to the ’talents’ of Lachlan Murdoch and his fellow billionaires, and the dud management appointments they made. Fairfax has lost well over $3 billion in total since taking over the Fairfax family controlled Rural Press a decade or more ago. Kerry Stokes showed a lack of his supposed acumen by creating Seven West Media from West Australian Newspapers and the Seven Network – it started life worth $4.1 billion in 2011 and is currently worth just over $1 billion.
CVC lost billions in buying Nine (including a lot of other businesses, such as ticketing, websites and magazines) from James Packer. News Corp has written down well over $2 billion from the value of its Australian newspaper and pay TV businesses with more to come in August), while smaller players such as Southern Cross and Prime are smaller and worth less than five years ago.
Fairfax’s trading update on Monday told us why the company has a weak future – Domain revenues up 10% (and digital up 22%), print revenues down by 10-11%, overall revenue down $100 million or so and earnings before interest, tax, depreciation down 7% or more to between $262 million to $266 million.
That is not a solid base on which to build a story of being a media ‘consolidator. The next big story will be the fate of the groups’s newspapers, but Domain is worth nowhere near as much without their still powerful information distribution systems (sales and websites).
