The Lion Nathan/Coca-Cola Amatil merger talks, as reported by The Australian Financial Review, make a lot of sense. And there are a lot more big mergers to come as industries are restructured so that companies can prosper despite lower growth times. Nowhere is merger mania going to be more widespread than in the media itself.
Indeed the forces are aligning for one of the biggest media ownership shake-ups in our history. Just as in the last big media ownership shake-up during the early 1990s, most of the major owners in 2008 have financial challenges that lower the value of their media properties and spark buyer interest.
But whereas in 1990 there were strict rules on media ownership, those rules have now been substantially relaxed so it is close to open season on media companies.
Rupert Murdoch was in trouble in 1990, but in 2008 he is able to pounce, though he will measure Australian opportunities against those offshore. Other international buyers will realise that this is a once in a lifetime chance to buy Australian media assets – particularly with the dollar low.
Among the local potential buyers, the most obvious candidate is the Seven Network. It is financially stretched, but Seven has Kerry Stokes behind it.
James Packer extracted unbelievable cash by selling to PBL, at the top of the market, 75% of the Nine network and the Packer publishing business. But he used that cash to expand his casino empire and is unlikely to return to media. Very wisely, James Packer stepped down from the hopelessly over-borrowed PBL media board so that his Consolidated Media, which still owns 25% of PBL, would not be liable for the PBL debts.
So let’s look at the properties that are likely to be available. My first candidate is John Fairfax. I realise Ron Walker, who has saddled up for another three years as chairman, would disagree, but the institutions have lost confidence and are looking to sell Fairfax if there is a buyer.
Ron Walker and the Fairfax board embraced a diversification strategy to lessen dependence on the Sydney Morning Herald and the Melbourne Age. When they bought the John B Fairfax media interests they used mainly shares, but most of the other acquisitions were for cash. As a result, the company has about $2.7 billion worth of debt – more than its market capitalisation.
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 million to $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. This is not a prediction, merely an alert. However, it helps explain why Fairfax shares have been trashed, thereby creating takeover vulnerability.
Incredible as it might seem, some analysts are now valuing the Sydney Morning Herald and The Age at a mere $750 million – that’s substantially below their value in 1990. In value terms, the big hitters for Fairfax are its community and regional newspapers – thanks to the decision of John B Fairfax to sell his interests to the public company that bears his family name. Financially it was not a good move for John B.
Such a small valuation by analysts of the SMH and Age illustrates the dismal prospects that institutions accord them, but it also shows that the SMH and Age have been used as cash cows, which has weakened them. But that’s a hindsight judgement. With the bank pressures a bit close, Fairfax will need to cut all the costs it can if its trading revenue starts to deteriorate further. Given the overall situation, many are eyeing Fairfax as a break-up.
For the second time in 20 years a buyer has vastly overpaid for the Nine network, so its debt is selling at a huge discount. At some point Nine will be for sale. Ten is full of problems and can be bought. APN is for sale and, given that it's only a holding company, lots of people are looking at Consolidated Media.
Murdoch says that the value of global media properties will decline over the coming year. He is probably right, but that would not stop Kerry Stokes dreaming of the possibility of linking the Seven Network with the Sydney Morning Herald and The Age (prior to the mid-1980s, Fairfax owned the SMH and Seven in Sydney). Stokes has already moved towards linking Seven and the Perth-based West Australian. Others will be looking at trying to combine the Fairfax and APN community and regional newspapers.
Given that the Australian downturn has only just started, there is no hurry – although once someone jumps, it will be a “now or never” situation and the action will start.
This article first appeared on Business Spectator
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