Liam Dann 's Opinion

Business editor of the NZ Herald

Liam Dann: Selling Trade Me will please the bankers

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It makes sense for Fairfax to get out but who takes control now will be the really interesting bit.

James Packer and News Ltd could be keen to take control of Trade Me. Photo / Supplied
James Packer and News Ltd could be keen to take control of Trade Me. Photo / Supplied

It isn't a surprise to see Fairfax selling out of Trade Me. It needs the cash to pay off debt and it doesn't have anything else that it can sell quickly enough and for the right kind of money.

If the Twitter reaction is anything to go by the local tech sector was shocked by the news. But market players have been tipping this since June when Fairfax sold down a further 15 per cent stake in Trade Me - just six months after the initial 34 per cent float.

Sure there were all sorts of brave-new-world media crossover strategies to be explored but Fairfax has run out of time and money to explore them. If the board wasn't already well aware of that you can be sure their bankers let them know what had to be done.

What will be interesting now will be to see if any another media or internet companies are game to step up, or whether Trade Me's ownership will be dominated by more conservative fund managers.

If the selldown goes as tipped then Trade Me's share register will be left wide open and waiting for a new suitor to take control.

Outside the Fairfax block, Trade Me has just three substantial security holders (those with more than a 5 per cent stake) on its register and they are all banking institutions or fund managers.

According to the latest Bloomberg record they are: JP Morgan with 5.8 per cent, Ellerston Capital with 5.2 per cent and Hyperion Asset Management with 5.1 per cent.

UBS - which was understood to be handling the selldown - also owns nearly 5 per cent.

By placing its stake widely with institutions Fairfax can at least try to spare itself the ignominy of handing its prize jewel to any of its immediate media rivals.

It has been suggested that James Packer and News Ltd might be interested. Ellerston Capital is owned by interests associated with Packer.

It is hard to see its ownership staying spread evenly across Australasian institutions for long. If it is not the local media players then there are any number of big tech companies with deep pockets that might be tempted.

Getting control of Trade Me won't require a full takeover play. Whoever is first to get a stake above 30 per cent will probably have enough to control the company as long as the rest of the ownership is thinly spread.

The kind of market interest this will generate means that the real winner will be the NZX - at least in the short term. It didn't get its pre-Christmas Mighty River float and adding the rest of Trade Me's market capitalisation would bring more depth and liquidity.

Not that Fairfax is the loser in this transaction, either. In fact, shareholders will be thanking their lucky stars the board had the foresight to buy Trade Me when it did.

If it was a private equity player it would look like it had pulled off a pretty well timed exit. It's not, of course, it is an industry player that probably did hope to do more with Trade Me, and it is likely the timing was accelerated by pressure from the banks. But although there may be some lost growth opportunities the bottom line is that Fairfax has done very well out of its Trade Me foray.

When Fairfax paid $700 million in 2006 the price raised plenty of eyebrows. Given the number of deals in that pre-GFC boom which later unravelled the returns have been great. Trade Me stands out locally as one of the only companies sold in that era that didn't see its value fall through the floor after the crisis.

If Fairfax gets the price being talked about it will have pocketed a total sale price in excess of $1.4 billion.

It's also had some pretty good dividends along the way - Fairfax received a $220 million dividend in the 2011 financial year.

But the easy gains with Trade Me have been made. It has earnings that are good enough to appeal to fund managers and retail investors but and it still has growth potential built in to its share price.

There are concerns, though, given its strong New Zealand focus.

If that long-term growth potential is to be realised it will need an owner with deep enough pockets to takes some risks - either in new geographic markets or new business markets.

That was never going to be Fairfax. However, as a debt-free media company Fairfax will find itself in a much better place to take risks and focus on growth in the media space it knows best.

Meanwhile, we'll watch the Trade Me action unfold on the NZX like a late model Corolla with low mileage and no reserve.

On Twitter: @liamdann

- NZ Herald

Liam Dann

Business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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