The course for Fairfax Media’s Domain separation track is now firmly set after yesterday’s 2016-17 financial report and update.
Fairfax in fact will follow Australian rival – News Corp – in creating a similar structure (News has its 61% owned REA Group listed on the ASX) – its most important asset in a partly-owned subsidiary that is listed on the ASX to allow investors to better value it and its worth to Fairfax and its shareholders.
Fairfax CEO, Greg Hywood made it clear in the earnings announcement and briefing yesterday that getting breaking up Fairfax by listing part of the Domain business on the ASX will be the major focus for the company up to the end of this year.
Fairfax will keep 60% of Domain and the rest will be handed to the company’s shareholders in a series of steps that will hopefully culminate with trading starting on the ASX in Domain shares towards the end of November.
But like other media reporting the outlook and current trading situation remains glum (‘challenging’ is again a favoured description of many media executives).
Fairfax said “Trading in the first six weeks of FY18 saw revenues around 4% below last year. Domain’s digital revenue growth was 26% and total revenue growth was 16%. Publishing trends were broadly consistent with FY17 H2.”
And once Domain is floated off, don’t be surprised if there is either a higher dividend or some more capital management next year (The Domain spin-off is a form of capita return).
The tone of the Fairfax results and briefing was starkly different to that from News Corp last Friday which was all all about cost cutting in its news and information business, with some talk about the prospects for REA and especially its US stablemate, Move (the latter is News Corp’s big focus).
And the Fairfax result was also very different to the red ink (over $988 million worth of impairments) stained report from Seven West Media with massive cuts to the value of its TV, newspaper, magazine and other assets.
Fairfax took near $900 million in cuts in 2015-16 as it started preparing the ground for the separation of Domain and then cut $30 million of costs (and the jobs of 125 journalists and others) earlier this year from its metro publishing division. That helped lift pre-tax earnings for the metro publishing businesses with a strong final quarter.
So it is no surprise that newspapers were not the focus of the Fairfax results this time round – instead it was the terms of the separation of the Domain business from the rest of the company and a timetable for the amicable divorce.
And the selling of the Domain financials started in earnest in the report and in the analysts briefing yesterday morning.That will be the case from now until early November.
As was expected the company’s results were mixed – weaker print revenues, some good, some worrying figures for Domain and a solid end to the 2016-17 financial year which saw operating earnings a bit better than previous forecast (which is something of a rarity for the company in recent years).
Fairfax said net profit rose 8% to $142.6 million, with group operating earnings before interest, tax, depreciation and amortisation of $271 million – $5 million to $10 million more than forecast, Revenues fell 4.8% to $1.73 billion.
Fairfax is paying a steady final dividend of 2 cents a share, and a unchanged final of 4 cents a share.
Hywood yesterday said the company was releasing a timeline for the Domain separation and listing on the ASX.
He said Fairfax Media will retain 60% of Domain, with 40% distributed to Fairfax shareholders. “We consider this to be the appropriate level to achieve sufficient liquidity in the market to maximise value over time.”
Domain is expected to have $150 million of net debt upon separation “with proceeds to Fairfax as part of business transfers.” Fairfax chair Nick Falloon will be Chairman of Domain,” Hywood said.
The formal report and details of the separation scheme will be ready late next month, with a roadshow to investors and shareholders in October, a shareholder vote in early November with trading in Domain shares expected to start in mid to late November.
Hywood said the core publishing business – Australian Metro Media – which includes The Sydney Morning Herald, The Age, The Australian Financial Review, Digital Ventures and Life and Events businesses – saw a 9% slide in revenues, but a 26% jump in earnings before interest tax depreciation and amortisation to $49.1 million from $36 million.
"Metro publishing advertising revenue declined 17%,” Mr Hywood said.
"Overall circulation revenue was stable, benefiting from the strong growth in paid digital subscriptions revenue which increased 21%. The Sydney Morning Herald, The Age and The Australian Financial Review have around 236,000 paid digital subscribers. All three titles delivered year-on-year growth. Declines in print circulation volumes were partially offset by cover price increases.
The company’s Australian Community media business saw an 11% fall in total revenue for the year with a 12% decline in advertising revenue which “reflected 2% growth in agriculture-related advertising, offset by weakness in national and classifieds advertising. Excluding the impact of closures and frequency changes, advertising revenue reduced 10%. Circulation revenue declined, reflecting lower retail volumes.” Ebitda fell to $73 million from $90 million.
"In New Zealand, total revenue was down 7% in local currency terms. "Digital revenue growth of 29% was offset by lower print advertising due to weakness in retail, motors and leisure categories. Circulation revenue declined 5% for the year with stabilisation in the second half reflecting improvements in yield.
Fairfax is appealing the decision by the NZ competition regulator to block its merger with rival NZME. If Fairfax wins the appeal the NZ operations won’t be in the books except through a 40% or so shareholding, and around $A50 million in still valuable cash.
Macquarie Media revenue was down 1%. Cost and operational synergies, together with licence fee relief in H2, delivered 26% uplift in EBITDA to $31.5 million from $25 million. Fairfax shares were down a touch at $1.015 yesterday.
