Fairfax Media and Nine Entertainment have finally announced plans to marry to create a large integrated media company, leaving Kerry Stokes’ financially weak Seven West Media as the odd one out.
The deal will be a cash and shares offer worth around $1 a share for Fairfax, or around $2.3 billion and will create a company with a value of around $4.4 billion including debt.
Nine is currently valued at $2.2 billion (before the offer) implying a combined value of nearly $4.4 billion.
Add in the 60% of Domain’s $1.79 billion in value owned by Fairfax and it has the bulk and asset spread to survive the growing assault from Google, Facebook, Amazon, Apple and Facebook. Seven West Media is valued at $1.3 billion and now looks like an orphan.
The deal has been described as a merger, but the reality is this is a takeover of Fairfax by Nine.
The merging process is just a way of doing the deal via a scheme of arrangement. The new company will be 51.1% owned by Nine shareholder with Fairfax shareholders owning the remaining 48.9%. Nine chair, Peter Costello will chair the new combined company, its CEO, Hugh Marks will be boss.
Three Fairfax directors will be invited to join the board and there will be two other Nine current directors. That means Nine will control the boardroom four votes to three. It is not a merger of equals, it is a takeover.
The Fairfax share price is well under the $1.27 a share that the shares reached in May last year when Fairfax was the subject of two abortive offers from US buyout groups, Hellman and Friedman and TPG.
Both groups withdrew their approaches after doing due diligence on the Fairfax books which tells a story – Fairfax wasn’t interesting enough to buy.
Fairfax shares sank, but steadied after it managed to spin off 40% of its Domain property business to Fairfax shareholders late in 2017.
Nine is offering shares because a cash offer would be too much for even its repaired balance sheet. As it is Nine will be offering a cash consideration of around $575 million.
Nine has the capacity to raise that sum – its net debt at the end of 2017 was just $46 million, while Fairfax had $156 million (Seven West Media by contrast, has promised to cut its debt to a huge $650 million by June 30. That was a barrier to a deal with Fairfax)
Fairfax and Nine said in a joint statement on Thursday morning that the proposed transaction would be implemented by Nine under a scheme of arrangement, subject to approvals. The merger will create a company capable of matching the reach of News Corp Australia which spans newspapers, radio, Pay TV and online operations centred on REA Group, the country’s largest.
News will be unhappy as it will look at the combined company and realise that it had a rival with sufficient bulk to resist the Murdoch empire’s continuing encroachment.
Will the Murdoch family’s News Corp take the risk and launch a bid for Seven, after all relations between Stokes and the Murdochs have grown closer in the past three years.
The two companies reckon the new company can find $50 million of cost savings over 2019 and 2020. That will be bad news for the most obvious source of savings – Fairfax’s newspapers – the Metros and the Community papers. There was talk of savings of $100 million.
The combined business will include Nine’s free to air network, 9Now, the streaming video joint venture with Fairfax Media – Stan – as well as Fairfax’s mastheads – which includes The Sydney Morning Herald, The Age and The Australian Financial Review. It will also include Fairfax Media’s investment in Macquarie Media, and Fairfax’s 60% stake in the Domain property website business, plus 54% of Macquarie Media, owners of 2GB and 3AW. The transaction is a reaction to the continuing slide in TV audiences, newspaper readership, advertising on TV and in print. It is the last circling of the wagons while the raiders – in the shape of Google, Facebook, Netflix – pick off viewers, readers, listeners and advertisers seemingly at will. Just to give this deal some context.
Earlier yesterday Facebook reported results that underwhelmed investors and the share price fell nearly 21%, wiping around $A170 billion off Facebook’s market value).
But Facebook did report a net profit for the quarter of $US5.12 billion, or nearly $A7 billion, which is more than the value of the Nine-Fairfax media transaction and with the value of Domain added on.
So what did investors think? Well, Fairfax shares were up around 12% at one stake at a day’s high of 88 cents, but then eased back to close up 8.4% at 84 cents.
Nine shares were sold off – as expected, it is making a bid and spending half a billion or so in cash – its shares ended the day down 10.3% at $2.26 and touched a low of $2.245.
The winner on the day was Domain Holdings, 60% owned by Fairfax – its shares ended up 9.12% at $3.35 and hit a high of $3.38.
