Fairfax Media's New Zealand business is worth just 5 Australian cents to the company's stock price on a discounted cash flow basis and divesting the assets could help unlock the value of key assets such as the Domain Australian real estate website, according to brokerage First NZ Capital.

In a report titled "FXJ starts the self-help process", the brokerage said Fairfax was "exposed if (it) does nothing".

Its weak share price meant Domain was undervalued "and has left FXJ exposed to a private equity bid and possible break up," the report said. "It is positive that the company appears to be taking steps to close the valuation gap and prevent the upside in Domain being extracted by an alternative owner."

First NZ retained its 'outperform' rating on Fairfax stock with a target price of A$1.10, which is about a fifth higher than its current price on the ASX. Fairfax rose 4.7 per cent to 90 Australian cents today.


Fairfax and APN said yesterday they were in exclusive talks about a potential merger of their New Zealand media assets this year, which would all be poured into an NZX-listed NZME, APN's local unit. If such a combination passes the New Zealand Commerce Commission's scrutiny, Fairfax would initially have a holding in the combined kiwi media company.

First NZ valued Domain at A$1.99 billion, or 87 cents a share on a discounted cash flow basis, making it by far the largest asset owned by Fairfax, whose current market capitalisation is A$1.97 billion. New Zealand media was valued at A$104 million, or 5 cents a share, about the same as for the company's 55 per cent stake in Macquarie Radio. Fairfax's Metro Media unit, which includes its major Australian newspapers, was valued at A$210 million, or 9 cents a share.

The brokerage said if Fairfax follows the planned path of APN and demerges its New Zealand business prior to a merger with NZME, it would result in Fairfax's complete exit from New Zealand and "materially reduce FXJ's print/publishing exposure."

"We would see this as a significant step in restructuring FXJ's asset mix and it should help unlock value in Domain," it said. A successful divestment of Fairfax New Zealand could be followed by a similar exit from the company's Australian community media operations, leaving "a slimmed down Fairfax consisting of Domain plus metro publishing" that would be viewed more favourably by investors.

"A Fairfax with less publishing exposure would also be better positioned to participate in sector M&A once media law changes," it said.

Deloitte drew similar conclusions in its independent evaluation of APN's demerger plan, saying the remaining Australian company would be free to pursue growth in its Australian radio and outdoor assets.

APN is likely to be part of "significant consolidation" in the Australian media market expected to follow proposed easing of media ownership law that would abolish the so-called 'two out of three rule', which prohibits ownership of more than two of a commercial television licence, radio licence or newspaper in the same market, and the '75 per cent audience reach rule', which prevents a national TV network from reaching more than 75 per cent of the population.

Deloitte says while the bill was introduced in March, the looming federal election means it is unlikely any significant media reforms would be enacted in 2016.