I Claudius, Says James Packer

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By Rudi Filapek-Vandyck

The difference between fundamental value and takeover appeal? Just ask GSJB Were strategist Chris Pidcock. He went “short” on John Fairfax (FXJ) last month only to get caught out by a sudden revival of consolidation fever this week.

If you are getting tired already of reading about Australian media, this is probably the time to book the around the world trip you always wanted. Chances are high that if you don’t become homesick and return early the Australian media landscape will look very different on your return.

This week saw James Packer and Kerry Stokes make the first moves in what has already been dubbed “The Great Carve Up”. Any Channel Nine nostalgia aside, there can be little doubt that Kerry Packer would have been proud about what son James has already achieved thus far: the soon-to-be announced media offload deal with a US private equity consortium offers cash in hand, major leverage capabilities and the additional benefit of keeping Publishing & Broadcasting’s (PBL) balance sheet out of the anticipated M&A frenzy. Most of all it is bound to create extra value to PBL and its shareholders.

Some commentators in the media have already described Packer’s move as a “master stroke”. However, Seven Network’s (SEV) executive chairman Kerry Stokes showed late on Tuesday it is far too early to talk in terms of winners and losers just yet by unexpectedly snapping up a 14.9% stake in West Australian Newspapers (WAN), the maximum allowed under the current media laws regime.

So whereto from here if you’re an investor in the Australian sharemarket?

As shown in the table below, the market had already decided who’s likely to become prey and who will be predator. With the exception of PBL and Seven, all media stocks are already trading well above average twelve month price targets set by the leading stockbrokers in the country. A logical decision since predators will be paying premiums to acquire additional assets next year.

How much premium? That’ll be the $60m dollar question. Seven’s willingness to pay a premium on top of the built-in premium in West Australian Newspapers’ share price shows that the gloves are off – anything is possible from here on, and that includes prices that will be paid to remain on top of the competition.

With the exception of ABN Amro and Merrill Lynch, none of the leading equity experts in Australia has bothered to make any changes to their valuations, forecasts, price targets or recommendations. This is a time when fundamental analysts are playing second fiddle, at best, and any error in print shall and will be used against them.

How much James Packer’s deal deserves the tag “master stroke” can be deduced from the fact that, as a pre-eminent predator who secured himself the driver’s seat in next year’s shake up, he also guaranteed shareholders and investors will continue to benefit from additional upside in the PBL share price.

Part of this upside will come from further initiatives in the gaming sector such as the planned share market listing of the company’s Macau venture, but the media spin-off deal certainly offers many avenues to add value as well. ABN Amro media analysts, in a preliminary analysis prior to the official announcement of the deal, put it as follows: “Upside could come from gearing up the vehicle to lower the cost of capital, taking out some costs, and bringing a larger, stronger media company back to market in 2-3 years time (potentially at a better point in the advertising cycle).”

To already capture some of the potential upside, ABN Amro analysts raised their PBL price target to $21.85 from $20.30.

Merrill Lynch added another twist to the potential upside story on Wednesday morning by raising the possibility that James Packer might take the company private post the media spin-off. The broker believes under such a scenario shareholders could be bought out as high as $22-$24 per share.

PBL shares were at $19.85 on Tuesday before a self-imposed trading halt..

As Kerry Stokes’ Seven Network has now secured a major stake in West Australian Newspapers, the most logical target for PBL is believed to be John Fairfax. It is common knowledge father Kerry would have loved to get his hands on the publisher of Australian media icons such as The Age and The Sydney Morning Herald.

Initial calculations are that James Packer has secured himself a $4.5bn war chest. At our last glance Fairfax’s market cap was a little above $4bn – this assuming James Packer won’t simply call in the new private equity partners to finance any public bid of course.

(The table suggests Prime TV is trading below its average twelve month price target as well as the last share price shown is the closing price on Tuesday. Today the Prime TV share price surged well beyond the $3.68).

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