What’s the worst Gina Rinehart could do to Fairfax?
Thursday, June 28, 2012/
At the time of writing, Fairfax’s shares are trading at 57 cents. Who knows where they’ll be should Gina Rinehart, who owns 18.67% of the company, follows through on her threat to sell her holdings if the board doesn’t give her the (three) board seats she wants.
Rinehart would like to be seen as the media company’s ‘white knight’, but today, she’s more likely to sell her stake than ever. Yesterday afternoon, the Fairfax board released a statement advising that, “it has been unable to extend an invitation to Gina Rinehart to join the board”. Fairfax chairman Corbett said he hoped it would be possible in the future. This suggests should she agree to sign the charter of editorial independence, the board would presumably reconsider her bid.
Her public comments suggest she is not in a mind to do so. In a statement, she said she would support an “effective” charter of independence, before pointing out how she believes the current charter is not currently applied at Fairfax. If the charter, rather than editorial independence as a concept, is what the board insists on before allowing Rinehart to join their club, they are unlikely to come to an amicable agreement with the iron ore magnate.
Thus, the threat of Rinehart selling her stake and causing the stock to plunge looms large. This won’t be welcomed by investors, but it could cause more direct difficulties for the Fairfax board.
Share price falls or drops in market capitalisation can trigger a breach of debt covenant agreements with banks, and Fairfax’s share price has fallen dramatically in the past 12 months. Analysts say there is little chance of this causing a problem, so far.
In February, Fairfax held $1.13 billion in debt, with revenues of $1.23 billion in the first half of the 2011/12 financial year. Since then, Fairfax has sold nearly half its stake in TradeMe, improving its balance sheet. Citi Investment Research estimates the company’s net debt will be $944 million at the end of the year.
Fairfax, who did not return calls before deadline, owes a lot of money, and has a dramatically falling share price. This combination, and the debt covenant clauses it often triggers, played a pivotal role in the downfall of companies such as ABC Learning, Allco and Babcock & Brown.
Media analyst Peter Cox says he isn’t informed on the specifics of Fairfax’s debt covenants, but he doesn’t think it’s a worry. Should there be a review of the debt, the fact that Fairfax continues to post profits means it is unlikely creditors will start demanding their money back.
“Fairfax is still making good profits,” he says. “Their ability to service their debt in the short-term is not being affected.”
Rinehart’s interest has already caused big job losses at Fairfax, says Cox.
“They cut 1,900 jobs to save eight [on the board],” he says about the company’s recent restructure. He paints it as the board shoring up shareholder support in the face of the overtures Rinehart was making.
“The internet hasn’t just suddenly come along. Classified advertising hasn’t just suddenly gone away… It’s been happening progressively over time. As [Fairfax CEO] Hywood said a month or two ago, he had no interest in paywalls. What’s changed to cause the dramatic shift? Well, Gina [Rinehart] came along and they got worried she would call an extraordinary general meeting and try and remove the board.”
Cox has a view strikingly different opinion to that of Corbett, who says the board rejected Rinehart’s bid for three seats after receiving correspondence from shareholders saying they supported the board’s stance.
If Rinehart doesn’t sell her shares, and instead try to take over the company (she is legally required to attempt a full takeover should her stake hit 20% within the next six months), Cox believes most shareholders would take the money, preferences for editorial independence notwithstanding.
“It’s a very concentrated shareholding… so most of them are sitting on very big losses,” Cox says. “If she came along and made an offer [to buy the company], they’ll make a decision on whether to try to minimise the loss they’ve already taken, or to hang in there as the company disappears out the door and they get nothing.”
“I think you’d find most major shareholders would take the money, especially if they thought she would take control of the company anyway and in the long-term cause the share price to tank.”