FYI | Oct 23 2006
By Greg Peel
“Expect the unexpected”, says Merrill Lynch.
This is an allusion to the fact that the great Australian media scramble, which kicked off last week, will likely see all sorts of shenanigans based more on positioning than price. If buyers don’t get in soon they may well miss out.
The big news has of course been Rupert’s foray into Fairfax (FXJ), acquiring a 7.5% that he described initially as “friendly” (not a word usually associated with Rupert in business circles) and later as “strategic”, as if nobody knew. We do know that News Corp (NWS) cannot acquire Fairfax in its current state, as that would be in breach of both the existing laws and the new laws.
John Howard brushed off excitable media comment about the News Corp stake and potential ramifications with the comment “people buy and sell shares every day”, as if the new media laws were nothing to do with it. This follows on from Helen Coonan’s earlier assertion that the scrambling seen last week – as Jamie unloaded Nine from Publishing & Broadcasting (PBL) and Seven (SEV) boss Kerry Stokes took a slice of West Australian News (WAN) – had nothing to do with the law changes. She later suggested there might possibly be some sort of connection.
It’s remarkable just what sort of idiots these people think we are.
Back in the real world, a lot will potentially happen between now and next year when the new laws come into place, although it can only be positioning at this stage, given the existing laws are still prohibitive. It’s a bit like arriving early to stake a claim at the front of a department store before the doors open for the post-Christmas sale.
What this means is that fundamental valuations are now out the window. It matters not what a media company is worth on paper, it matters that there are only so many on offer. Given the government’s new laws ensure outside players will remain just that, it’s left to the incumbents to consolidate even further, which will ensure reduced diversity, unless a cavalry of foreign raiders appears on the left flank. If these are American, then woe betide us.
FN Arena noted last week (I Caudius, Says Jamie Packer, 18/10/06) that the current prices for most media stocks are already at or above average analysts’ target prices, which highlights the fact that fundamentals will now take a back seat. In such cases some analysts retain their fundamental targets, while suggesting possible takeover premiums, while other analysts shuffle up their targets to perceived takeover offer levels. All this means is that average targets offer little insight from here on.
PBL and Seven were always seen as predators rather than prey, and that has played out so far. The next move will likely be in the radio networks, with analysts predicting Southern Cross Broadcasting (SBC) and Austereo (AUN) to be in the cross-hairs. Thereafter the trickle down should see the likes of regional media such as Prime Television (PRT) and Rural Press (RUP) acquiring suitors.
But the interesting one is Fairfax. Over the past years of media speculation, which began when the Coalition government won a majority in the Senate, and won religious extremists Family First as a bonus (blocking out the Greens and offsetting National stirrer and renegade conscience voter Barnaby Joyce), Fairfax has been considered a company that could easily be both predator and prey.
Predator, because Fairfax has been quick to respond to the onslaught of new media – moving briskly into acquiring websites and consolidating Fairfax Digital.
And, more importantly, prey, because of its reputation for newspaper excellence in The Sydney Morning Herald and The Age, and the Australian Financial Review, and for its classified dominance.
One must remember that Fairfax classifieds are not just about selling your Commodore in the Herald. This is old media, and threatened by the internet. More lucrative are classifieds in the Fin, which despite falling circulation, will remain a bastion of old media in the top end of the market. Prestige car distributors advertise in the Fin. Corporations seek new CEO’s in the Fin. Advertisements attract a lot of money in the Fin.
This is one reason why commentators believe Fairfax is not beyond fragmentation. Fairfax Digital is as good as a stand alone business, despite being shafted by a government still pandering to its FTA TV gods. The Fin is one of only two Australian national newspapers (the other being Rupert’s The Australian, which is not a business rag). The metro dailies have prestige status, but are on the wane. Bits of Fairfax are attractive to some and not others.
Prior to last week, Merrill Lynch placed a sum-of-the-parts (SOTP) valuation on Fairfax of $4.30-4.90, but by applying takeover premiums that value has risen to a high end of $5.45. This moves the target from $4.40 to $5.45. Rupert paid $5.20. This implies a high multiple, notes Merrills, but the analysts think it will go higher still.
In fact, Merrills would not be surprised to see bids in the order of $5.50-6.00. The analysts refer to New Zealand in the mid 90s, when the stock price of Wilson & Horton was driven up 65% by a battle between Brierley Investments and Independent News & Media.
Merrills thinks Rupert is positioning in Fairfax to block a “disruptive” TV network from moving in. JP Morgan thinks he’s looking for the break-up (or simply looking to make a buck in the race). The analysts won’t rule out private equity interest, which could perceive value through reorganising Fairfax’s assets.
In this day and age, I wouldn’t rule out my mother being taken over by private equity.
JP Morgan has set a $5.30 “corporate valuation” at this stage, while retaining a $5.00 target against its Overweight rating (up from $4.80). This is one example of where targets start to become misleading.
Jamie is loaded and ready to snaffle up some of Fairfax. Will he? Well, Dad always wanted to, but its more likely Jamie will stick to pokies. Stokes is into the West Australian (he is a Perth boy after all). If any television network is going to pile into Fairfax, who would it be?
Could it be Ten (TEN)? Ten is more likely prey, and significant shareholder CanWest has admitted it is happy to sell. Only one broker in the FNA database currently calls Ten a Buy. The network has been washed over by the new media revolution, choosing to put its faith in the tired franchises of Big Brother and Idol, and in the ridiculous amount forked out on AFL (with Seven).
Between falling advertising revenues and AFL costs, analysts are loath to recommend either Ten or Seven too strongly. Foxtel has already laughed off the consortium’s asking price for a share of AFL rights, and both networks are going to hope like hell the Sydney Swans keep making the finals. If not, Sydney will lose interest, and so will advertisers.
It’s amusing watching Cardboard Kenny Sutherland and his rival network colleagues blathering on in network sponsored ads that pay TV wants to take all your sport and make you pay for it. Of all the sporting events corralled by FTA TV under the anti-siphoning laws, 25% makes it to air. Of that, 50% is delayed. Pay TV is another media segment that’s been screwed by the government, because the networks know that if pay TV can broadcast the sport that they won’t, FTA will lose even more of the advertising pie, and pay TV subscriptions would fall to levels the average punter could well afford. That would be the final nail in the coffin for FTA.
Hence the sickening campaign.
One thing is for certain and that is there is money to be made for the wily investor in the media sector over the next six months. Are the premiums already too high? It depends what happens. The best one can hope for was summed up by Merrill Lynch – “Expect the unexpected”.