tip off

How six bad Fairfax calls cost shareholders almost $4b

Despite the masses of column centimetres devoted to the machinations at Fairfax since Greg Hywood’s company-transforming announcement last week, no one, especially no one writing at Fairfax, has explained exactly what went wrong at the once-fine instruction. While much focus has been given to the drying up of Fairfax’s “rivers of gold”, it was the company’s continued digital failures and foolhardy offline acquisitions that have been the main reason for Fairfax’s share price dropping from $5.30 to only 58 cents.

Fairfax executives and board members have sat back and watched more than 80% of the value of the company evaporate. To compare — in 2005, Gina Rinehart was worth $900 million and Fairfax was valued at about $7 billion. So Rinehart could have used all her wealth to buy less than 13% of Fairfax. She can now afford almost 30 Fairfaxes.

Fairfax, of course, is no stranger to managerial incompetence. Warwick Fairfax jnr (the son of Warwick Oswald Fairfax and his third wife, Mary) attempted to restore his family’s legacy in 1987 through a highly leveraged buyout of the eponymous company (with the help of financier “Last Resort” Laurie Connell). The Harvard and Oxford-educated scion showed the kind of financial expertise that would later befall Fairfax, ending up destroying his fortune and (whatever minimal) reputation he had. Fairfax fell into administration three years later and was re-floated on the ASX in 1992.

After a decade of relative calm, since 2002, various Fairfax executives and their bumbling board have managed to stumble from disaster to fiasco, in the process destroying billions of dollars of shareholder wealth and mortally wounding one of the world’s great media companies.

Buying Rural Press in 2006: In late 2006, at the height of the credit bubble (and months before the first cracks of the GFC would emerge), Fairfax launched a $2.3 billion takeover of Rural Press — at the time, Fairfax shares leapt to $5.21 and the merged company had an enterprise value of more than $9 billion. The deal was led by former CEO David Kirk and chairman Ron Walker, and involved the return of James B Fairfax to the company’s board. (James Fairfax had sold his Fairfax stake to cousin Warwick back in 1987 and used some of the proceeds in 1988 to purchase Rural Press for $20 million).

How successful was Walker’s and Kirk’s rural folly? According to the Citigroup (and reported in Fairfax’s Financial Review) Fairfax’s regional assets are forecast to contribute $155 million in 2013 to the company’s EBITDA (giving them an estimated value of $620 million, but bear in mind that those assets included Fairfax’s pre-Rural Press regional assets). Or to put it another way, the Rural Press purchase costs shareholders about $1.8 billion in little over five years. At the time, Fairfax shareholders didn’t have a say in the transaction, as this columnist noted, so the blame can rest entirely on the heads of Walker, Kirk and the Fairfax board, which included current chair Roger Corbett, investment banker Mark Burrows, former Village director David Evans and Julia King.

Buying Southern Cross Broadcasting’s radio assets in 2007: Fresh from consummating the Rural Press purchase, Ron Walker upped the ante and teamed with Macquarie Media to overpay for the assets of Southern Cross Broadcasting. The timing couldn’t have been worse, with the media boom coming to an end within months. Under the deal, Macquarie Media scooped up SCB’s regional TV assets while Fairfax bought the radio properties for $480 million. At the time, this columnist suggested that the acquisition ”looked like 1987 all over again”. While Fairfax managed to sell some of the SBC’s assets, the acquisition turned out to be another disaster with the $480 million purchase forecast to generated EBITDA of about $21 million in 2013. Citigroup values Fairfax’s radio assets at $170 million for a loss of upwards of $250 million.

Building its Melbourne printing press: As part of the shake-up, Hywood announced that Fairfax would try to sell its printing assets, the largest being its high-tech Tullamarine facility. The Age stated on Saturday that the Tullamarine site was originally bought for $5.6 million in 1999 and Fairfax subsequently spent $220 building the existing factory, which included machinery from Germany and Switzerland. Fairfax is expected to generate $20-$25 million from the sale, meaning that it has blown another $200 million.

Not buying Seek.com.au: In 2003, with the rivers of gold still flowing into the Fairfax bank accounts, the company was led by former McKinsey boss Fred Hilmer and chaired by Dean Wills. The Wharton-educated Hilmer would exhibit the kind of management expertise that would set a precedent at Fairfax for the next decade when he and Wills decided not to invest in fledgling internet site  Seek.com.au. James Packer didn’t make the same mistake, turning a $33 million investment into a $400 profit (which much of that profit coming at the expense of Fairfax).

Fairfax executives compounded their error in 2005, mocking Seek by claiming that the website “attract[s] approximately 1.6 million unique browsers to their site each month”, which was less than what Fairfax’s print mastheads achieve in a week.  Today, Seek has a market value of $2.11 billion — Fairfax has a market capitalisation $1.36 billion. Fred and Dean, take a bow.

Not buying RealEstate.com and Carsales.com.au: Seek wasn’t the only blue-chip digital opportunity that Fairfax missed. In 2000, Fairfax rejected the opportunity to purchase a stake in RealEstate.com. Instead, News Limited took a 44% interest for only $2.2 million. That $2.2 million stake is now worth more than $700 million. Fairfax also missed out on buying an interest in a nascent Carsales.com.au. PBL Media weren’t so foolish and ended up making a $560 million profit on its investment.

With Fairfax sacking 2000 workers and radically reducing its commitment to journalism, the blame lies clearly at the feet of Fred Hilmer, David Kirk, Brian McCarthy, Ron Walker, Dean Wills, Roger Corbett and the slew of highly paid executives and directors who have mismanaged one of Australia’s great companies through not one, but a series of inexcusable blunders.

The six decisions described cost Fairfax shareholders, combined, almost $4 billion. A truly remarkable achievement in incompetence.

*Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed

4
  • 1
    paddy
    Posted Monday, 25 June 2012 at 2:37 pm | Permalink

    Even allowing for “the benefit of hindsight” factor, that’s a truly amazing series of management blunders.

  • 2
    Winslow Rory
    Posted Monday, 25 June 2012 at 3:28 pm | Permalink

    The analysis of the Rural Press merger is pretty flimsy economics.

    It looks at the rural newspapers as if they’re a separate entity and does not take into account the fact the entire company’s value has deflated since the merger.

    This article simply says that Rural Press is now worth about a third of what Fairfax paid for it. But could this actually be viewed as a good business move, considering that the entire company has deflated to about a 10th of its worth at the same time?

    Or, to put it another way:

    The rural and regional newspapers make money. The metropolitan newspapers don’t.

    It would be fair to argue that the only thing keeping the SMH and Age afloat has been the dedication of print readers in regional markets.

  • 3
    Ron Lee
    Posted Monday, 25 June 2012 at 5:21 pm | Permalink

    Crikey needs to publish more history like this. People forget.
    It is especially relevant when one of those responsible for the fiasco is still there as Chairman!

    A more detailed study of the Chairman’s CV is illuminating as it highlights his term as CEO at Woolworths operating in an duopoly with a lame competitor whose Board was so incompetent that for years they could not manage to appoint a CEO who was simply honest and had Australian retailing experience. i.e. Brian Quinn, Dennis Eck and John Fletcher. No wonder Corbett looked good in comparison.

  • 4
    Dogs breakfast
    Posted Tuesday, 26 June 2012 at 6:12 pm | Permalink

    Adam would no doubt be able to tell us approximately how much money these CEO’s, Directors and Chairmen took out of Fairfax while they were fiddling, that might really make a few teeth grate.

    It was always difficult during the early tech years to know what was going to work and what wasn’t, and it is easy to criticise in hindsight, but there is a strong argument to say that Fairfax should have been all over seek and carsales as a defensive play, i.e. if they were successful and cannibalised the rivers of gold then they would benefit from that side as well.

    And given that Fairfax totally pwned the job ads and to a lesser extent the car sales industry, and might I say charged like wounded bulls for the privilege, they might have made an ever greater success of those two ventures by aligning them with their print business.

    Again, it’s much easier in hindsight, but these people utter the word ‘strategic’ whne they are talking about breakfast decisions, but real strategy is much harder than what the corporate and academic worlds put out. There are more management consultants doing ‘strategy’ at exorbitant fees than you can poke a stick at, but the number of examples of companies who have been ‘successfully strategic’ seem to be able to be counted on one hand.

    And that’s not just the media, it runs through the banking system, big industry, the incredible blunders of the big miners, god knows it’s not likely to be the end of it either.

    But they’ll still pull down those alarmingly large pay packets.

    For what exactly????????

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