If TPG and its mysterious consortium mates can get to the starting line with its confusing partial offer for Fairfax Media, the $2.2 billion it is said to be offering for the Domain property business, The Age, The Sydney Morning Herald and the Financial Review (plus associated events and digital assets) will be the largest amount paid in the final round of ownership changes triggered by the Murdoch, sorry, Turnbull government’s proposed media law changes.
All other deals that would be possible if the media law changes clear Parliament — Nine Entertainment, Seven West media, Southern Cross, Prime Media, Ten network, WIN, Macquarie Media, Austereo, APN, and even News Corp Australia’s papers, plus its stakes in Fox Sports and half of Foxtel — would not go anywhere near the valuation TPG and its unknown supporters claim to want to pay for Fairfax’s properties.
Such has been the collapse in the business models for newspapers, radio, TV (free to air and Pay) in recent years that each owner’s value is falling rapidly — but not the jewels in Fairfax in the shape of Domain, or REA Group, 61% owned by News Corp.
And the $2.2 billion (which is more than Fairfax was worth a year ago, when it was trading at 84 cents, with a market value of just under $2.1 billion) isn’t being “offered” because the business being bought is a stunning legacy media operation, but because the Domain property business is the only important online asset left in Australian hands, along with the news websites of the SMH and The Age. And with the likes of Amazon approaching Australia, a website with high visibility and earnings has more value than just a property/media business.
And in structuring its offer to Fairfax management in the way it has, TPG has acknowledged what Crikey pointed out earlier this year and in 2016 — that Domain needs the trio of papers as marketing tools for the online listings. And because of that, the AFR needs the production operations of the SMH and The Age to stay alive as a daily paper. Without those (as Fairfax realised late last year), the AFR is too expensive to produce and would lose a cost-effective print distribution system as well.
That is an understanding News Corp managers have been slow to realise with its 61%-owned online giant in REA Group. News is now moving quickly to more closely tie the links to its vast spread of papers to REA Group much in the way Fairfax has inserted Domain into the pages and websites of the SMH, Age and AFR. And News Corp managers know that without the daily tabloid operations in the major cities, the heavy loss-making operation that is the overstaffed Australian would have to close. It is being subsidised, like the AFR, but the production and distribution teams for the tabloids.
Fairfax CEO Greg Hywood was called into meetings with senior executives at the company’s Pyrmont headquarters on Sunday (driving into the building in his now legendary blue Maserati). After those talks he issued a memo to staff.
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“Appropriately, the Fairfax board is reviewing the indicative proposal,” he said in his memo.”There is no certainty that the indicative proposal will result in an offer for Fairfax, what the terms of any offer would be, or whether there will be a recommendation by the Fairfax board. There is also no certainty that the indicative proposal is capable of being implemented given the complexity involved in splitting the businesses.”
News of the TPG approach should cause the Fairfax share price to rise this morning, but not by much because at Friday’s close of $1.06 (down 2.3%) the company was valued at $2.44 billion. The assets not wanted by TPG would not add very much to that valuation. The latest move from TPG follows up reported interest in April when it was revealed TPG had bought a 4.7% stake in Fairfax.
A rather silly editorial in the Weekend AFR attacked Fairfax’s striking journalists. Coming hours before the emergence of the latest TPG offer, the editorial was a model of ignorance of the realities of corporate life at Fairfax. There is only one worthwhile asset left on the books: not the trio of print mastheads, but Domain. Had it not been the core business left in Fairfax Media, the price would not have been anywhere near the suggested $2.2 billion (or 95 cents a share in cash) — in fact it would not have been made at all.
Yes, the Fairfax metro papers eke out a small profit (which is falling rapidly) on an EBITDA (earnings before interest, tax, depreciation and amortisation) basis, but that is an accounting fudge when the assets involved are not making an actual profit after the payment of costs such as interest, tax, depreciation and amortisation that more normal businesses have to provide for in their accounts.
The AFR editorialist wrote: “Amid all this, the Financial Review suggests there is a commercial model for quality journalism. Our print and digital readership is growing more quickly than any other national or metro masthead.”
The reality is that print sales are falling and Fairfax has stopped releasing digital subscription data to the the independent Audit Bureau, preferring to give publishers figures that could be as rubbery as Fairfax’s idea of profit. The rising readership of the print edition, as sales fall, is also a triumph of creative figuring. We can believe those assertions when full transparency is restored to all circulation and readership data, not just the ones massaged by management to look good.