However, NZME may choose instead to try and out-compete its main rival, which it has been attempting to merge with since 2016, said Jarden. The firm advised NZME on the unsuccessful deal, which was rejected by the competition watchdog, the Commerce Commission, whose decision was upheld by the Court of Appeal before NZME abandoned the bid.
It also made a ham-fisted attempt last month to force Stuff's previous owner, Sydney-based Nine Entertainment, to conclude a sale to NZME for $1 and simultaneously to convince the government to pass special legislation to overrule the Commerce Commission's stance. The failure of that gambit and dissatisfaction over progress on NZME's own earnings revival strategy saw NZME chairman Peter Cullinane step down just minutes before the company was to hold its annual meeting a fortnight ago.
The Jarden analysis by head of research Arie Dekker and equities analyst Grant Lowe mentions none of this recent history but argues that NZME has done a "good job" of weathering the impact of the Covid pandemic on its short term revenues, and rerates the stock to 'outperform', with a target share price of 40 cents. The NZME share price sank as low as 18 cents in early April, recovered to a recent peak of 34.5 cents during several days of unusually high volume trading after the annual meeting, and was quoted on the NZX today at 30 cents. The shares listed at $1 in 2016 when it was carved out of APN News & Media.
Jarden says the investment case for NZME remains "finely balanced," with the current $140 million enterprise value representing an "interesting entry."
"Conviction in the stock still needs a revenue offset to under-pressure print ad and circulation revenues."
The analysis also expresses doubts about Stuff's prospects following its sale to Boucher after Nine failed to find another buyer in the two years since it bought the New Zealand assets as part of the wider Australasian Fairfax Media Group.
Nothing for Nine
"We view this deal as a reasonably clear indication that there literally was nothing left in Stuff for its owner, with it no doubt happy to move on the lease liabilities, contingent staff liabilities and potentially the operating losses being incurred as advertising takes a hit from Covid," the research note says, noting that Boucher has made clear that the media sector still requires government support and that reform is required to level the playing field with global online platforms that have robbed news media of much of its traditional advertising revenue.
"There will remain opportunities for NZME and Stuff to look at how they might work together but we think it is similarly likely that NZME will look how it takes advantage of the situation, with opportunities to be more aggressive in competing for online market share" and to push its NZ Herald brand into the Wellington and South Island markets.
On Stuff's prospects, Jarden said its main masthead titles face increasing challenges of scale and that it has under-invested in its online platform, Stuff.co.nz, and suggests that its less diverse business - unlike NZME, Stuff has no radio assets - means it "may find it more difficult coming out of the Covid disruption."
Both NZME and Stuff will face renewed headwinds as their eligibility for the government's wage subsidy scheme expires, with Stuff's new management in part depending on the fact that Nine has left proceeds from the sale of Stuff Fibre, a broadband play, as working capital that will ultimately have to be repaid.
"As the wage subsidy runs dry for Stuff, there are likely some big changes that are going to be needed if Stuff is to avoid running through the fibre cash proceeds retained in the business too fast."
Donation success
Boucher said Stuff's recent introduction of a contribution system akin to The Guardian's, where readers can make one-off and regular donations, had produced revenue at much the same rate as would have been forecast had the company introduced a 'hard' paywall subscription model, as NZME has done for premium content on its NZ Herald website.
Offers from would-be investors and collaborators with Stuff had been "varied, ranging from people who are interested in making significant personal contributions to support journalism through to other entities that would like either to buy a stake, or to buy Stuff outright."
Jarden also speculates that Boucher will have difficulty structuring an attractive employee share scheme, "given the market value that has been placed on this business through this sale process."
Boucher said details of the share employee scheme were still some weeks away and that there would be options for staff that allowed them to "get a benefit that they don't have to pay for."
Dekker and Lowe expect NZME will be able to continue to pay down debt, as long as ad revenues recover, and speculate that the 90 basis point increase in the interest rate charged on recently renewed and enlarged credit lines reflect a deal between NZME and its bankers to relax its lending covenants to allow it to "trade through the immediate disruption" caused by Covid-19.
