Fran O'Sullivan: Investor shakes up media firms

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Market player has urged Fairfax and APN to restructure to reduce debt exposures and criticised investments.

Fairfax's Sydney Morning Herald will be converted to a compact format. Photo / Thinkstock
Fairfax's Sydney Morning Herald will be converted to a compact format. Photo / Thinkstock

Self-described contrarian investment firm Allan Gray has emerged as a major player in the media shake-up under way in the Australasian market.

Founder and part-owner Simon Marais has been a big behind-the-scenes thorn in the side of the two media companies in which Allan Gray has significant stakes - Fairfax (10.24 per cent) and Herald owner APN News & Media (19.8 per cent) - challenging directors and management on their strategies.

Marais has not had a big profile on this side of the Tasman.

But he emerged as a pivotal player in the recent Fisher & Paykel Appliances takeover when F&P's major Chinese shareholder, Haier, announced it had cemented a lock-up agreement for Allan Gray's 17.46 per cent stake.

In recent months, he has urged both Fairfax (owner of a string of metropolitan papers in New Zealand) and APN to restructure their businesses to reduce their respective debt exposures, criticised investment choices and even suggested both media empires merge.

Those who have followed Marais' comments will not have been surprised by the Fairfax move to divest Trade Me.

His merger suggestion has not been given much credence to date. But in the volatile world of the Australasian media market it would be difficult to rule out any future options.

It's not been plain sailing for Australian media over the past 12 months. Research undertaken by Greg Fraser of Fat Prophets for the Australian demonstrates the value of the five big Australian media names - Network Ten, APN News & Media, Fairfax Media, Seven West Media and Southern Cross Austereo - has dropped collectively by more than a third this year, wiping out A$2.6 billlion ($3.24 billion).

But the "new media darlings" have prospered.

Seek, real estate advertiser REA Group and Carsales.com are now worth a combined A$6.5 billion - 44 per cent more than the five "old media" companies and nearly 40 per cent more than their own collective value at the start of the year.

That's why some have found it hard to understand why Fairfax flicked its only major profitable digital asset last weekend.

But, counter-intuitively, it is also why "old media" companies are fast switching their emphasis to the digital space where advertising revenues are growing - up 8 per cent year in Australia this year for digital classifieds, though down for digital display advertising.

In the off-market sale, Fairfax divested its 51 per cent holding in Trade Me for about A$616 million, lowering its debt to an estimated A$230 million.

With the loss of Trade Me, the company loses its major profit shield and will have to make hay in a very short advertising market at the same time as it transforms itself for the digital media age.

The previous Thursday, APN announced its earnings before interest, tax, depreciation and amortisation would be A$150 million to A$155 million - 11 per cent below consensus Ebitda forecasts, the upshot of a decline in the advertising market.

Major divisions such as outdoor advertising were prospering. Regional newspaper markets like Queensland had been hit hard but APN chief executive Brett Chenoweth was confident the market would come back.

APN has changed its management structure to give effect to the emphasis on digital strategies. Marais recently applauded APN's decision to sell its South Island newspaper titles.

And on the Fairfax front, the company suggested it had the support of its major shareholders including Gina Rinehart and Allan Gray for its Trade Me sale.

The question for both companies is "What next?"

Fairfax chairman Roger Corbett and chief executive Greg Hywood will be hoping they have bought some breathing space from shareholder pressure.

Hywood has cautioned against the prospect of major acquisitions. He's keeping the hammer down on costs (sub-editing at the Australian Financial Review may be outsourced to Pagemasters).

The two major mastheads - the Sydney Morning Herald and the Age in Melbourne - will be converted to compacts, like the New Zealand Herald. Printing plants are being rationalised.

The real issue is whether Hywood has the smarts to successfully execute the transition to a fully digital age.

Shareholder pressures on APN are different but no less poignant.

The largest shareholder in APN is the Irish company Independent News and Media (INM) which has a total of 28.9 per cent held through INM Australia (17. 6 per cent) and News & Media NZ (11.3 per cent). INM's shares were trading at €0.04 (6c) yesterday. The highest price for the year was €0.32.

INM has put its South African subsidiary on the market.

Last month, the company said it would need "urgent and substantial" restructuring in response to high levels of debt and tough trading.

A subsequent report in the British Sunday Times said INM planned to ask its lenders to wipe off €100 million of debt as part of a wider overhaul in discussions it hoped to conclude with its eight-strong banking consortium early next year.

Allan Gray - which is not represented on the APN board - will continue to make its voice known, as APN moves forward into the digital age.

The problem both Fairfax and APN face is that Trade Me - now decoupled from its previous shareholder - is likely to go even harder into the digital sales space.

Trade Me chairman David Kirk is reported as saying it would expand classifieds in motoring and jobs.

But on this side of the Tasman the two major players may now have to dance faster with a new player - not handicapped by legacy assets - invading their space.

- NZ Herald

Fran O'Sullivan

A columnist for the NZ Herald

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