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Dec 17, 2012

Save me, Trade Me: Fairfax sells profitable NZ site

Debt-plagued Fairfax has moved to a full sale of profitable Kiwi classifieds site Trade Me. Was it the right move, as the company seeks to pay down debt in a troubled market? Myriam Robin and Matthew Knott report.

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When Fairfax sold 15% of its stake in profitable New Zealand classifieds site Trade Me in June, Microsoft executive turned technology investor Daniel Petre knew a full sale wasn’t far away.

Petre — who is reportedly poised to sign up with Fairfax to advise on digital opportunities — tells Crikey the company’s decision, signalled on the weekend, to sell its remaining 51% stake in the Kiwi cash cow is “exactly the right thing to do”. Not everyone agrees, however.

“It makes an enormous amount of sense,” said Petre, executive chairman of tech investment company netus. “They got a good price for it … The clock was ticking after the partial sell-down in June.”

The sale frees up funds to spend on future redundancies and digital investments. Petre, who declined to comment on his future with Fairfax, has a history of championing websites not dependent on advertising revenue — an attractive proposition to Fairfax given the glum ad market.

Media analyst Peter Cox, who stood unsuccessfully for a spot on the Fairfax board at the last annual general meeting, also regards the sale as a smart move.

“Trade Me was a mature product,” Cox said. In New Zealand, which has a population of 4.4 million, there are 2.5 million registered Trade Me users. “Everybody that they could get to, they had gotten to. Penetration is maximised.”

Cox thinks Fairfax should get out of NZ altogether. “New Zealand is a full-penetration, low-growth market. You don’t need to be involved in New Zealand,” he told Crikey.

After buying the site in 2006 for $625 million, Fairfax sold Trade Me in three tranches. It listed 35% of the company in an initial public offering in late 2011, netting it NZ$363.5 million ($291.25 million). Fairfax got $160 million in June for another 15% of Trade Me, and $616 million from Saturday’s sale. Add that all up and you get $1.067 billion, or a 70% profit on Fairfax’s initial $625 investment. Not bad for six years’ work.

Steve Allen, a media analyst and the managing director of Fusion Strategy, is in two minds about the sale. “While the rationale is terribly simple to follow … there’s a big question mark on this,” he told Crikey. Allen says Trade Me has likely “reached its peak”, making the sale a way to maximise value. But he worries about the pressure Fairfax’s board has been under to reduce debt.

“Debt is absolutely on the nose with investors, analysts and major shareholders,” he said. “I think the market is behaving somewhat irrationally and forcing listed media companies to take decisions … that might not have been sensible. Assets are coming up for sale that often, like this one, you really do question.”

After all, even if Trade Me stopped growing in the future, it was still making Fairfax a lot of money. “Fairfax’s other assets have diminishing profits in general,” Allen said.

Cox takes a more hawkish view on the reduction of the media company’s debt, which after the Trade Me sale is down to $200 million, from $815 million. “They need a balance sheet to support acquisitions in the future,” he said.

“This is an industry where the bottom line is dropping by the day. You can’t afford to have debt hanging over your head. I can still see a lot of red ink at Fairfax — their profits will keep shrinking, and those interest payments are better spent elsewhere.”

Allen says that by paying down more than $600 million-worth of debt, Fairfax’s interest payments are likely to go down by at least $40 million a year.

Not that Cox expects to see this invested back into the company’s journalists. “I think the structure of all media businesses is going to have to change. Digital companies run on far less staff,” he said.

Fairfax shares rose 6% in early trade before declining somewhat. They’re still up 3% on Friday’s close.

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