Gina Rinehart made some important discoveries about the Fairfax group last week.
The mere suggestion that she could be a seller sent the shares plummeting about 10% and took the group’s market capitalisation down to $1.1 billion. At June 30 2012 the book value of shareholders funds fell from $4.4 billion to $2 billion so the market is halving the value again.
That will ring alarm bells among the holders of the $1.2 billion Fairfax debt as at June 30. In the Fairfax camp they point to the fact that the group had cash of $358 million at balance date and earnings before interest tax and depreciation topped $500 million in 2011-12.
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Nevertheless Rinehart has graphically shown the extreme level of shareholder nervousness in the friendless Fairfax company. Rinehart now knows that if she wants to buy Fairfax (leaving aside the Ten Network shareholder complication) and break up Fairfax, the former media giant looks to be there for the taking.
Second, the three Fairfax opinion-forming mastheads – the Financial Review, The Sydney Morning Herald and The Age are not very profitable. We always knew The Age and SMH were struggling but we did not know that the Financial Review group could only manage an EBIT of $3 million last year (2010-11: $8.6 million). It’s a stunningly low figure and not an acceptable level in the longer term given the value of the masthead on the market.
There is no doubt that Rinehart wants a “more balanced coverage” of issues relating to whether carbon causes global warming, industrial relations and issues that affect the mining industry. A minority Rinehart shareholding will not change anything – she has to own to own one or all three of the opinion forming publications in the Fairfax group.
But surely by now someone will have told Gina Rinehart that being a right wing media proprietor and trying to develop the Roy Hill iron ore mine under existing industrial relations laws means that the mine will be very expensive to develop. The unions are waiting to teach her a lesson. It is possible that the Western Australian government will adopt Victoria’s building rules, which have the potential to slash construction costs by 25%, but the current fast track Roy Hill timetable makes that impossible.
At some point Roy Hill bankers have to put it Gina Rinehart that no matter how tempting Fairfax is she needs to make a choice between being a miner and a media proprietor.
But as I have said many times, Gina Rinehart will not take kindly to that suggestion.
This article first appeared on Business Spectator.