Are Fairfax’s days numbered? With speculation mounting that it could become a takeover target the board held an emergency meeting yesterday and former CEO Fred Hilmer told ABC radio the company “had well-developed plans to respond to any takeover move” — especially from James Packer.
Chairman Ron Walker insists both publicly and privately that Fairfax is not for sale and the talk in the last few days has been about a “defence strategy”. But of course the board is legally obliged to act in the interests of shareholders, and according a hefty research report by investment bank Morgan Stanley a few weeks ago, by far the best strategy for the board would be to hang out the For Sale sign.
Morgan Stanley argues that the best outcome for Fairfax would be achieved by breaking up the company and selling off the parts separately. The report — Fairfax (John) Holdings, The Path Less Travelled — argues that major acquisitions don’t make sense for Fairfax because it has too much debt, its businesses are delivering mixed returns and facing “structural risks” and it has no competitive advantage.
It concludes Fairfax shares currently have an underlying value of between $3.70 and $3.90, but a break-up and sell-off could net almost $5 based on these valuations (without a merger and acquisition premium):
- Metro newspaper, including The Age, SMH and digital: $2.4 billion
- Australian regional newspapers: $1.07 billion
- Australian business publications: $576 million
- Australian community newspapers: $162 million
- NZ newspapers: $1.79 billion
- NZ digital: $627 million
On these valuations Fairfax would be worth about $6.64 billion which, when you take out debt, creates a value of $4.98 a share, the investment bank argues.
Which raises some serious issues for Ron Walker and David Kirk. If they mean what they say about fending off barbarians Fairfax shareholders are entitled to ask whose interests the dynamic duo is serving. And should Walker and Kirk try and enter the game as buyers, alarm bells should be ringing about the potential destruction of shareholder value.
Coonan’s media reforms have unleashed a process that now has its own remorseless logic. Fairfax is ripe for a break-up that will net investors healthy returns and consign Australia’s most influential house of independent private-sector journalism to oblivion.