Australia | Jul 04 2007
By Chris Shaw
Since Macquarie Media (MMG) took a stake in Southern Cross Broadcasting (SBC) some months ago a takeover had seemed likely, the deal finally eventuating yesterday but with Fairfax Media (FXJ) also taking part and securing some of the SBC assets for an investment of around $480m.
Consensus opinion is Fairfax has made out fairly well with its haul of the Southern Star production assets and Southern Cross’s radio stations (it will sell its regional radio assets to Macquarie Media), though JP Morgan and Deutsche Bank both suggest the company paid a lot for the latter but a fair price for the former.
Regardless, JP Morgan sees minimal earnings impact from the deal in the medium-term, though as ABN Amro notes there is potential for the company to generate additional synergies and some cross-platform advertising benefits from having a combination of radio and newspaper assets. On the negative side, Credit Suisse points out Fairfax will need to work carefully to integrate the Southern Star assets into its model.
Merrill Lynch is in agreement, the broker estimating the deal will be about EPS (earnings per share) neutral initially but with upside potential depending how the synergy story plays out over time. In the view of GSJB Were this makes the stock more a FY09 earnings story, though the broker does estimate the deal will be marginally earnings positive immediately.
This view of Weres is significant as it means the broker is looking at the stock as an earnings story rather than a likely corporate target, a change in approach both JP Morgan and Merrill Lynch have also adopted as a result of the deal.
The change has led JP Morgan to drop its price target to $4.80 from $5.65, as in its view there had been a takeover premium built in and this is no longer appropriate. Deutsche also sees the new Fairfax Media as a more complex beast, the broker suggesting it would now be a much more complicated task for a buyer, and especially one with TV assets, to make a move on the company.
The only broker to lift its price target as a result of the asset shuffling is Citi, increasing it to $5.24 from $4.75 in the expectation the Rural Press and now Southern Cross deals will generate synergy benefits greater than are currently expected. The broker also suggests there is potential for the company to grow its digital earnings while defending its position in metropolitan newspapers. It has upgraded its rating to Buy from Hold at the same time, though this is in response to recent share price weakness.
Overall the FNArena database shows the stock is rated as Buy five times and Hold four times, with an average price target of $5.25. This is little changed from before the Southern Cross deal as the Citi increase is offset by the JP Morgan decrease. In comparison, Thomson One Analytics shows a median price target of $5.45.
Shares in Fairfax today are stronger despite a slightly weaker overall market and at 2.35pm were up 9c at $4.64.