The shrinking of the Australian legacy media is underway with the Financial Review yesterday reporting that Kerry Stokes’ Seven West Media is talking to Fairfax Media about a potential marriage – that’s after everybody’s favourites, Fairfax and Nine Entertainment failed to agree to an engagement.
According to the AFR the talks started before the media laws passed the Senate last week – eager beavers both of them. The marriage would see Stokes dominate the company. He currently owns 41% of Seven West through his majority controlled Seven Group Holdings. Any merger would see that cut (cash would not be a big part of any deal).
The story left the market underwhelmed – Fairfax shares were up half a per cent at 95.5 cents, Seven West shares fell half a cent to 71.5 cents
Fairfax would have to do the deal being twice as big as Seven and with much less debt. Seven would have great difficulty raising enough money to fund the cash component of any bid seeing it has more that $800 million in debt whereas Fairfax has only $145 million.
But there is one point that underlines the desperation in all this talk of bids and deals – at Friday’s ASX close Seven West Media had a market value of $1.09 billion, Fairfax’s value was just on $2.2 billion. Combined the company would be worth perhaps $3.3 billion. Ad the usual robber’s margin for control and you could get a value of $3.4-$3.5 billion – at most.
That is clearly too much. Earlier this year Hellman and Friedman, the US private equity shark offered $2.87 billion in a non-binding offer for Fairfax, a bit ahead of the indicative bid from rival shark, TPG.
Both were offering cash, any deal between Fairfax and Seven, or Fairfax and Nine would be a mixture of cash and shares to allow fund managers to remain invested in the merged company- but it would still be a huge premium to what the hard heads of the two private equity companies refused to pay after doing due diligence on Fairfax.
That means either company will be overpaying for the other (whichever way any deal is done). And both have a long history of overpaying. When it was formed back in 2011 from the merger of Seven Media Group and West Australian Newspapers, Seven West Media was worth $4.1 billion.
Some $3 billion plus in impairments later and Seven West’s revenue and earnings have been weakening slowly for the past five years. Its print assets – Pacific Magazines and the West Australian newspapers are floundering as revenue slumps (The Seven Network is far more resilient).
Seven West’s WA monopoly has been no defence against falling revenues and profits, which in turn has produced big job cuts. Taking over the Sunday Times nearly a year ago has just added to the concentration in weak print assets in Perth (which has been the worst performed of all metro markets for the last three years).
Fairfax took write offs of more than $900 million 18 months ago to start the separation of Domain from the rest of the companies – that will happen by the end of this year. More than 120 journalists jobs were cut in April, a move that helped steady the slide in print profits.
But that will only be a temporary respite. Fairfax paid $2.8 billion for the Fairfax family dominated Rural Press in 2006 – all that has been wasted and more, along with thousands of jobs.
Like Seven, Fairfax has a long and proud history of overpaying for assets and then making spectacular losses from write downs, impairments and retrenchment costs. As noted Seven West Media had a value of $4.1 billion when formed in 2011 – and any merger this time round will see a company formed valued at a sum less than that figure.
That more than anything tells us the futility of the media law changes. The key parts of the law changed last week were not introduced in the late 1980’s by the Hawke-Keating government, but by the Howard government in 2006 when Senator Helen Coonan was the relevant minister – the regulatory formwork was based on the number of ‘voices’ – radio, print tv – in various markets.
Foxtel was exempted, as it is now. Cue for another round of fruitless mergers and acquisition activity and big losses.
