Fairfax nine merger

A month before it is to be consummated, the Nine Entertainment takeover of Fairfax Media is already showing the one factor common to media deals in this country — they destroy value.

Just as with Seven West Media, created with a value of $4.1 billion in 2011, has devolved into a company recently valued at $1.15 billion, the proposed bid for Fairfax from Nine has seen more than $1 billion wiped from the value of the two companies since the deal’s announcement on July 26.

Friday’s sharp fall in the value of shares (5.2% for Fairfax and 4% for Nine) tells us investors no longer see the takeover as a $4 billion deal. The value is now around $2.9 billion, shares in Nine and Fairfax tumbling 30% and 25% respectively since the announcement. In the same period, the market is down by just 6.3%, so the fall can’t be blamed on October’s big sell off.

Nine was valued at $1.47 billion as of Friday, Fairfax was $1.45 billion, and with the key Fairfax shareholder meetings two weeks away, it is impossible to see the value of the deal returning to the $4 billion level of late July.

Perhaps some investors are becoming worried the deal might be knocked back or delayed by competition worries at the Australian Competition and Consumer Commission. It has said it will deliver its opinion by November 8. That is unlikely. It seems investors are discounting the valuation and profits from the deal before it happens, giving it a thumbs down.

The message for Nine from the share slide is even more decisive — at $1.69 on Friday, Nine’s shares are now back to where they were in February, before the better than expected interim profit announcement sent shares surging to their all-time highs of around $2.56, which was just before the Fairfax deal was announced. The shares have sold off from that date. Fairfax shares closed at 63 cents on Friday, just above the lows hit the week before.

There is very little left in the deal for Fairfax shareholders, but that won’t stop the deal from happening at the lower value.

At the time of the bid announcement, the offer valued Fairfax shares at 93.9 cents (they were trading at 77 cents). At Friday’s close of $1.69 and 63 cents, there’s little premium left in the offer to pay Fairfax shareholders for the change of control of their company. The only way to restore value to the offer would be for Nine to add more cash to the derisory 2.5 cents a share (a total of just $57 million).

Any extra cash would see Nine having to raid its cookie jar or borrow more money, and the one defining part of the deal’s structure is the low debt it leaves the merged company. Any increase in the cash consideration would raise debt and increase pressure on Nine to lift the $50 million in promised job cuts and sell Fairfax assets more quickly — such as its regional and NZ papers.

All Nine really wants is control of Domain (whose shares have also tumbled 25% since July 26) and the 50% of streaming service Stan. Everything else is marginal to those two assets.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey

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