Will recent history repeat itself in the case of the shrinking $3.1 billion Nine Entertainment takeover of Fairfax Media?
Assuming the share prices of Nine Entertainment and Fairfax Media steady and the deal survives the $900 million loss in value, what are the chances of the merged company surviving the coming years without suffering the same fate as Seven West Media?
The deal was announced on July 25 with a $4 billion value. Now some analysts wonder if the slump in value might blow it up.
The bottom line for the merged Nine-Fairfax is that it has to avoid being a typical Australian media merger that destroys value, forces write-downs and job losses and sees shares prices sink to levels where the companies resemble zombies — companies like Seven West Media, the Kerry Stokes-dominated group created from the merger of West Australian Newspapers and Seven Media Group.
A tale of two mergers
There are already some similarities between the two.
First, the documentation of the Seven West-West Australian deal in 2011 described it as the “largest Australian domiciled media company” in 2011, worth $4.1 billion. By 2018, that had shrunk to $1.25 billion. The Grant Samuel independent expert’s report on the Nine-Fairfax deal describes the merged company as “Australia’s largest ASX listed media group”. Is that going to be a curse for Nine and Fairfax?
Second, a high reliance on intangible assets in its balance sheet means Nine-Fairfax faces a start in life similar to that of Seven West Media.
Third, a starting value of $4 billion at the time of the July 25 merger announcement is similar to the starting value of Seven West Media of $4.1 billion. The Seven West products were similar too, featuring newspapers and magazines (The West Australian and Pacific Magazines), the leading free-to-air TV network and growing digital operations (led by Yahoo7), major sports broadcasting contracts (AFL and tennis) and a small but growing TV production arm.
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Where does Nine have the advantage?
Seven West Media started life with $4.18 billion of intangibles and nearly $2.08 billion of debt. It was that combination that made Seven West especially vulnerable to the impact of the shrinking ad market for TV and print and rapid growth of Facebook and Google.
Those factors and weak finances helped destroy the company’s 2011 asset values, forcing Seven to make cumulative write-downs of close to $3 billion and to cut debt. It still has well over $600 million in net debt, but can’t refinance because of its low share price (83 cents).
But the combined Nine will have one major difference to Seven West Media: much lower debt. Net debt is estimated in the report at just $358 million, which will give the company much greater leeway to withstand a repeat of the slide in TV and print ad revenues that we have seen in recent years.
Nine-Fairfax would contain more troubled print operations than Seven West did — some magazines, more websites, the leading free-to-air TV network. However, with the 59.4% of Domain and 100% of the Stan streaming video service, the new company will enjoy digital assets that Seven West Media didn’t have and which are better suited to the future.
Nine clearly understands the problem of over-valued deals and assets, especially intangibles. Hence it is signalling that once the merger is done, the combined company will conduct a review and load all the costs and losses into the June 30, 2019 half year, so that the combined company can start life from July 1 with as clean a balance sheet as possible.
Call it “resizing”, or moving to “align” the combined group with its “strategic objectives and digital future”; there are going to be further stories of job losses, cost cuts (on top of the $50 million already outlined), write-downs and more.