The daggers
are out for Sensis, Telstra’s online directory offshoot which chief executive
Sol Trujillo predicts will account for nearly half of the company’s revenue
growth in the next three years.

Sensis tells us it “serves the
advertising needs of almost 600,000 Australian businesses,” while “the entire
paid search industry has less than 15,000.” And Sensis’s share of “the combined
main media/online advertising market is 13.5% compared to 3% for the entire
online advertising industry (without Sensis).”

But there’s an important
proviso. Sensis may market itself as an internet search engine, but the figures
the company trumpets include sales and revenue from the paper-based Yellow
Pages
. One of its rivals, News Ltd, reports that only 7% of Sensis’s sales
come from online activities, and that 68% of its sales come from the Yellow
Pages
in book form. (We put these figures to Sensis, who have yet to dispute
them).

But there are real doubts about Sensis’s ability to exploit the
online space, and fulfil its predictions of $3bn in revenue by FY10 from
$1.585bn in FY05 – and today Crikey received this tip about how Sensis’s
Trading Post business is really performing:

The re-branding of Trading Post nationally has failed
to grow circulation. If the decline in circulation continues, the entire
Trading Post business model could implode requiring a massive
restructuring of the business and forcing Sensis to admit it paid too much and
potentially forcing a revaluation.

2004-2006 Trading Post
sales:
Sydney 65 to 43
Melbourne 95 to 68
Brisbane 65 to 45
Adelaide
35 to 27

Profit Summary
2005 June Financial Year $64.5M EBITDA

2006 June Financial Year $71 EBITDA Budget
2006 June Financial Year $61M
EBITDA – Reforecast
2006 June Financial Year $58M Latest
expectation

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Telstra in $636m Post buy

By Eli Greenblat
March 9, 2004

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Sensis boss Andrew Day believes he has found a good bargain in buying Trading Post Group for $636 million.

Picture: Michael Rayner

Telstra’s directories arm,
Sensis, has paid $636 million for the newspaper and online assets of
the Trading Post Group, as the telco unveils a blueprint for creating
its own “rivers of gold” from the increasingly popular world of buy,
sell and trade ads.

The Trading Post mastheads and online sites
sell a range of goods, from cars and caravans, dolls and collectables,
to livestock and property. Total revenue is expected to hit $148
million in calendar 2004.

It is believed that Sensis beat
publisher John Fairfax Holdings, owner of The Age, global media company
News Corporation and Kerry Packer’s Publishing and Broadcasting Ltd to
pick up the Australian Trading Post assets from its Dutch owner, Trader
Classified Media NV.

Fairfax was believed to be close to
winning the battle for Trading Post but was gazumped by Telstra in the
final round. A spokesman for Fairfax said the $636 million final price
paid was “way out of the criteria for such an acquisition”.

The
purchase, the third by Sensis this year, will deliver the group two
classified print publications, five complementary online sites, two
automotive inserts and the popular classified advertising brand,
Trading Post.

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Sensis chief executive Andrew Day said his management team was
confident of extracting an estimated $11 million a year in savings and
synergies from the combination of its Yellow Pages and White Pages
directories and the Trading Post classifieds.

He said there
were opportunities to expand the model overseas, with Sensis interested
in working with Trader Classified Media, which had combined classifieds
and Yellow Pages directories in Eastern Europe.

Mr Day said
blending the two advertising businesses had worked well in Eastern
Europe and was a concept Sensis would investigate once yesterday's
acquisition was bedded down.

Telstra chief executive Ziggy
Switkowski conceded yesterday the company had paid a "full price" to
trounce the rival bidders for the Australian assets of Trading Post.

"We knew from the outset the price for this quality asset would be a
full one," he said. "We are buying a strategically important business
for Sensis and I've got great faith in Sensis's ability to manage
growth in Trading Post Group and begin the process of unlocking value
from the many clear opportunities described."

Dr Switkowski
said the Telstra board had enthusiastically embraced the Trading Post
deal. The acquisition is slated to be cash-flow positive in the first
year and to add to earnings per share in year two.

One telecom
analyst said that while Trading Post housed some excellent high-growth
assets, Telstra's purchase price looked extravagant.

"At this
price, it is about 12 times EBITDA (earnings before interest, tax,
depreciation and amortisation). That's very high; and I've got some
real doubts over Telstra's ability to capture the synergies and cost
savings they are talking about."

Federal Opposition communications spokesman Lindsay Tanner said that on the surface it seemed Telstra paid too much.

"Yet,
again, Telstra management seems to want to do anything except run a
telecommunications company," Mr Tanner said. "Telstra has money to
splash around on overpriced acquisitions, but is continually cutting
investment in infrastructure and lagging in the roll-out of broadband."

According to Trader Classified Media's financial results for
2003, its Australian operations generated organic growth of 14.5 per
cent last calendar year.

EBITDA of the Australian operations was $46 million in 2003 and is expected to rise to $53 million in 2004.

Mr Day said Trading Post was on track to record revenue growth of 15
per cent in 2004. He said EBITDA should exceed $64 million in 2004-05.

"This acquisition extends the strategy we have had for the past three
years and represents a strong push into mainstream Australian
classified advertising, in both print and online, and in
high-performing, high-growth and iconic assets," Mr Day said.

Sensis reported revenue of $769 million for the six months to December 31, up 5.2 per cent on the previous period.

Shares in Telstra closed down 5¢ at $4.72.

The World Today Archive - Monday, 8 March , 2004 12:26:45

Reporter: Stephen Long

HAMISH ROBERTSON: Telstra's Boardroom has
already been in turmoil over a leaked plan to merge part of its
business with the Fairfax newspaper group.

But Telstra has instead bought a company that Fairfax had in its sights, the Trading Post.

Telstra
announced today that its advertising arm, Sensis, has paid a cool $636
million to buy the Trading Post

Joining us with more on the story is our Finance Correspondent Stephen Long.

(To Stephen Long) Stephen, was this a surprise move by Telstra?

STEPHEN LONG: Yes and no is the only answer I can give to that, Hamish.

Yes,
a surprise in the sense that just four days ago, the Telstra Chief
Executive Ziggy Switkowski said that Telstra had no major acquisitions
in plan, and that was in response to questions peppered at Ziggy
Switkowski by journalists about the failed plan to buy the Fairfax
newspapers.

But not a surprise in the sense that Telstra's made
it clear for some time that it's been looking to build up Sensis, its
advertising arm, and it's had its eye on the so-called 'rivers of gold'
of classified advertising in the country, which is why it was looking
at doing some sort of deal with Fairfax.

And in fact, in a
briefing this morning, Bruce Akhurst, who's the Group Managing Director
of Broadcast and Media for Telstra, made it clear that Telstra has had
its eyes on the Trading Post for some time.

BRUCE AKHURST: Local
classified advertising is a high double-digit growth sector. The Trader
is the pick of the bunch, this is the one to get, it's at the top of
the tree. We've been interested in Trader for over six years.

The
latest round of discussion with the proprietor Mr McBane have been
underway since May last year, and the proposal received unqualified and
unanimous Board support from Telstra.

HAMISH ROBERTSON: That was Bruce Akhurst, who is the Group Managing Director of Broadcast and Media for Telstra.

(To
Stephen Long) Stephen Long, unanimous Board support for the purchase,
clearly. That seems to be in sharp contrast to the planned Fairfax deal.

STEPHEN
LONG: Oh very much so, where the Board quashed the plan put forward by
Ziggy Switkowski to merge Sensis with Fairfax and acquire the 'rivers
of gold' of classified advertising that the Fairfax newspapers run, and
where there's still investigations into who on the Board leaked
material to the media about the plan.

Now clearly this is far
less politically controversial for Telstra than some sort of merger
with Fairfax. But also, the revenues won't be quite as high although
Telstra is saying that it will be cash-flow positive within a year, and
they're pitching it as a pretty good deal.

HAMISH ROBERTSON:
Well like Telstra, the Trading Post is an icon brand for many
Australians, especially those looking for a second-hand barbecue or a
pre-loved camera. How long has the Trading Post been operating?

STEPHEN
LONG: Well it goes right back to the 1960s, the history of the Trading
Post in Australia, when a former naval officer by the name of Charles
Faulkner and his wife Margaret settled back in Melbourne after living
in the United States.

Apparently Margaret Faulkner had the
inspiration for modelling the Trading Post on a newspaper that was
circulating in Norfolk, Virginia.

And from trial and error they built it up into the multimillion dollar business it is today.

One
of the key changes was the decision of the recent management and owners
to take the Trading Post online, and that is what's made the business
very very attractive to Telstra, because they can see considerable
synergies with Sensis, which publishes the White and Yellow Pages, and
has a big online presence in advertising.

This will take its share of the advertising market in Australia – that's Telstra's Sensis – from 13 per cent to 15 per cent.

HAMISH ROBERTSON: Very briefly Stephen, $636 million is a lot of money. In your estimation is it perhaps too much?

STEPHEN LONG: Well it's hard for me to say, but that's certainly what a lot of analysts seem to think, Hamish.

It's
certainly well above what many expected that Telstra would pay for this
business, and clearly well above what Fairfax was willing to pay. One
of the ironies is Fairfax had its eye on this business as well.

And Telstra's shares fell on the market after the news was announced today.

HAMISH ROBERTSON: Stephen Long, many thanks for that.


Australian Broadcasting Corporation