Over recent weeks, a very sensitive question has been circulating through the media industry and among investors: can Fairfax Media survive in its current form?
The pre-conditions for Fairfax being forced by banks or shareholders into some kind of break-up or sell-out are now, unfortunately, palpable.
- The Fairfax share price has collapsed well beyond the market — down 70% in the past year, compared with a fall of around 50% in the ASX 200 index.
- Almost all Fairfax media properties are losing large amounts of advertising revenue and profitability — and the economic downturn has only just started.
- The viability of the Fairfax newspaper business model is threatened more than before as the economy worsens and advertisers gravitate towards lower-cost, targeted media options.
- Fairfax now has more debt than its market capitalisation.
- Despite the damage inflicted on the company’s main mastheads, the Fairfax board continues to maintain their balance sheet valuations even though most analysts now believe they are worth substantially less, perhaps by $1 billion or more.
Adding momentum to these headwinds is another, perhaps even deeper, dilemma — dwindling investor confidence in the capability of the Fairfax board or management to comprehend, let alone deal with, these cyclical and structural assaults on their business.
At the company’s annual general meeting on November 13, chairman Ron Walker and CEO David Kirk both devoted most of their speeches to extolling the strength of the company, in large part because of its diversification beyond The Sydney Morning Herald and The Age.
“Our diversification, balance and scale make us the largest and strongest media company in Australasia,” boasted Kirk.
“Fairfax is better positioned today than at any time in its recent history to face these challenging times”.
Kirk’s eulogy to the company’s prescience and skill ended with a brief sentence informing shareholders that profit in the first quarter of the current financial year “was below the same period last year by mid-teen percentages” and that “the current low levels of business and consumer confidence together with continuing uncertainty and volatility in financial markets makes it very difficult to predict trends for the crucial Christmas trading period and beyond”. In other words: we’re a wonderful company whose profits are falling like a stone and we can’t predict what will happen next.
The market response was swift and brutal. In the week following the AGM, Fairfax’s share price fell by almost a third (as the broader market fell some 10%). While the company’s newspapers have conspicuously ignored coverage of their own parlous situation, two former Fairfax business commentators have been less restrained. Robert Gottliebsen and Stephen Bartholomeusz, writing in Business Spectator (declaration: I am a shareholder and chairman of Business Spectator), have raised fundamental questions about the Fairfax strategy and future.
“The analysts were angry partly because [the profit news] came somewhat out of the blue — Fairfax had studiously avoided giving specific guidance until that moment – but more particularly because it imploded the myth that the debt-funded acquisition spree Fairfax has pursued over recent years has produced true diversification in its earnings base,” wrote Bartholomeusz.
“While the acquisitions of Rural Press, Southern Cross and newspapers in New Zealand has produced some diversification away from the group’s traditional reliance on its metropolitan newspapers, Fairfax remains largely a pure media business and therefore remains leveraged to the economic cycle and its impact on advertising volumes”.
Gottliebsen was even blunter: “… the institutions have lost confidence and are looking to sell Fairfax if there is a buyer,” he wrote. “
According to the analysts, if the Fairfax EBITA falls to $620 million, it will test its debt covenants. The Fairfax EBITA in 2007-08 was around $820 million, so there was a big margin. But analysts are now saying Fairfax EBITA is likely to fall into the $720-$730 million range in 2008-09. If the economic slump accelerates and the downturn is twice the analysts’ forecast rate, then Fairfax hits the danger zone”.
If Fairfax’s problems were limited only to the impact of global financial turmoil, investors would probably be more tolerant. But they aren’t. In the past six months Fairfax’s share price has fallen 10% more than its peers News Corp and West Australian Newspapers and almost 20% more than Seven Network.
That’s because Fairfax’s problems run much deeper than seasonally falling advertising revenues. As the real estate, recruitment and automotive marketplaces suffer in unison, the vulnerability of all Fairfax newspapers — metropolitan, national, regional and suburban — to the downturn in the key classified advertising categories is stark. At the same time the structural threats to the profitability of the company’s major organs, the SMH, Age and AFR, are greater than they were even a year ago. And presiding over this “perfect storm” is a board and management with hardly any publishing experience.
Adding even more bite to this cocktail is the role of the company’s biggest shareholder, John B Fairfax, who has sat at the board table and watched the value of his shareholding implode by almost 80% since he agreed to merge his Rural Press cashcow with Fairfax in what, at the time, looked like his deal of a lifetime. There is much speculation about what John B will do to protect his remaining investment in Fairfax, and whether he will continue to support a board and management strategy that has trashed his wealth and reputation.
The prospect of Australia’s marquee newspaper company being broken up and sold off in parts is alarming to anyone who cherishes the Fairfax heritage and its storied place in the world of Australian journalism. It would be a tragedy. And it would almost certainly accelerate the decline in the quality of Australian journalism.
Yet that prospect is now being openly canvassed because of the widespread belief that the board and management cannot understand or control events. All they seem capable of doing is maintaining the pretence of healthy normality while slashing costs as revenues fall.
The custodians at Fairfax have demonstrably failed to protect one of this country’s most important media institutions.
Eric Beecher is chairman of Private Media, publisher of Crikey.