Founder wins in Trade Me deal

Australian newspaper publisher John Fairfax yesterday bought the online auction website Trade Me, in a $700 million-plus bid to protect its huge classified advertising sales from online competition.

The deal, worth $227 million to Trade Me founder Sam Morgan, will give the publisher New Zealand's most popular website and a business that has grown since start-up in 1999 into a behemoth reportedly making more than $300 million in annual sales.

Much of this growth has come at the expense of big publishers' classified advertisements. These represent about 40 per cent of Fairfax's New Zealand sales, which stood at $274 million in the six months to December.

News of the deal on this side of the Tasman was greeted with surprise. Brokers gave huge accolades to Morgan and his backers, but expressed doubts about the benefits of the deal for Fairfax. "Morgan has nailed it, absolutely nailed it," said Tyndall Investment Management fund manager James Lindsay.

"I cannot work, I am paralysed with jealousy," said another analyst.

Even Finance Minister Michael Cullen declared Morgan "typifies the smart, tech-savvy Kiwi we need to help transform this economy".

Morgan said he had not had much time to think about the deal.

"I have been busy with lawyers for the last two or three weeks so I need to spend some time with my family to take some time off," he said.

However, Fairfax shares slid 4Ac to A$3.90 in Australia, amid concerns about the price, equal to just over 17 per cent of Fairfax's A$3.6 billion market value and more than its New Zealand operations sales.

"It has a sniff of a panic buy," Greg Fraser, a media analyst at Shaw Stockbroking in Sydney, told Bloomberg. "New Zealand is a small market and I can't see what they can do to grow the business."

Debt ratings agency Standard & Poor's downgraded its long-term, corporate outlook on Fairfax from stable to negative."The group's appetite for financial risk remains a key focus for the rating, particularly given the likelihood of Fairfax making more acquisitions in the online space in the short-to-medium term," S&P said.

Ken Steinke, chief executive APN National Publishing, publisher of the New Zealand Herald and Fairfax's largest New Zealand competitor, said: "The competitors are the same as before. We are going to keep following our strategy we have always followed. We are going to pursue the on-line market aggressively." It will expand its Search4 stable of sites this year.

The sale, which is still subject to Overseas Investment Commission approval, values Trade Me at 26.9 times this March year's trading profits of $26 million and 15.6 times next year's $45 million trading profits.

Ebay, a US-based online auction site, is trading 25 times this year's trading profits and 17 times next year's, but is not growing as fast.

The deal is the latest in a series of moves by Fairfax in New Zealand since it acquired INL's publishing assets, including the Dominion Post, the Press and Waikato Times for $1.2 billion in 2003. Since then, it has spent $10.8 million on the titles linked with the Rodney Times and late last month an undisclosed sum on the Independent business weekly.

Fairfax New Zealand chief executive Joan Withers said: "We believe the price is absolutely appropriate given the growth trajectory that Trade Me is on and its unique position in the New Zealand market."

Trade Me would continue to operate autonomously. Fairfax had no plans to take the Trade Me platform to Australia nor any plans to integrate classified advertising from its titles with the website.

"The acquisition is justified purely on the potential of the New Zealand market," Withers said.

Morgan must stay with the company for at least a year, but said he would remain as long as he enjoyed it. Meanwhile, Fairfax is to establish a joint advisory board for the business although details on who will sit on the board have yet to be established.

Fairfax will fund the deal through a mixture of debt and equity. It will pay Trade Me's owners up to another $50 million if it delivers trading profits of more than $45 million in the coming year.

Buyers have been sniffing around Trade Me for years, with rumours linking the website to eBay, magazine publisher ACP Media, Telecom and APN. Morgan confirmed he had had conversations with various parties over the past few years, but said Fairfax was the first company with which he had had a "meeting of the minds" on the value of the company.

- Additional reporting, agencies