Revealed: NZME, Fairfax merger plan to create NZ's biggest media company

NZME will demerge from its Australian parent APN.

NZME and Fairfax NZ believe their planned merger will free up investment for high-quality journalism and build a media company with sufficient scale to fight off the impact of Google and Facebook on audiences and revenues.

"Quality journalistic content that consumers choose to engage with is the only competitive edge available in a digital world, where anyone can create and upload content," say the two media companies in their joint case to the Commerce Commission for the merger to proceed.

Their application to the Commerce Commission, which was lodged today, emphasises the dramatically transforming media landscape has driven the two media competitors to enter into exclusive merger talks.

"In this digital world the parties compete against both global content giants with scale advantages and small digital-only start-ups and blogs with low cost bases," the application notes." The parties need to develop a viable position in the middle of that spectrum.

"The transaction will allow the merged business to deliver enhanced quality and diversity of editorial offering."

NZME and Fairfax NZ point to studies that show publishing mergers result in an improvement in quality and diversity. "The reason for this is clear: the merged group's financial success depends on it being able to attract the widest range of audiences possible in competition against all other sources of content.

"The merged business will be incentivised to retain talented journalists across the spectrum of views to continue to expand that audience reach."

The two NZ publishing companies paint a story of a local media industry which has been subject to exponential change over the last five years. That is set to continue, with prime newspaper readership and revenue in decline and revenue from the online/news information provision becoming highly competitive.

As expected, the companies make the case that there is little overlap within their respective newspaper segments and, where it occurs, other competitive forces exist. They say paywalls are not necessarily an answer to declining revenues in a Facebook age.

The two major websites, stuff.co.nz and nzherald.co.nz, are expected to be retained followed the proposed merger.

NZME and Fairfax NZ believe the two websites will provide critical online mass - at both audience and revenue levels - for their combined forces to compete against online giants like Google and Facebook.

The joint application illustrates the dramatic impact that Google and Facebook are having on online revenues. It is estimated that 50 per cent of online advertising expenditure in New Zealand is now being placed with Google and Facebook alone (64 per cent in the US).

The Standard Media Index estimates that a combined NZME and Fairfax NZ would have had 11.7 per cent of the online agency spend as at February 2016: Google had 37.3 per cent and Facebook 16.4 per cent.

NZME and Fairfax NZ say that the merged business would continue to develop and invest in new and innovative digital opportunities to maintain and grow its share of digital revenue. "This is essential given in the future it is likely that some newspapers will no longer be printed every day and digital revenue (in particular mobile revenue) will therefore be the primary source of revenue."

They also emphasise at some point in the near to medium term, it will be necessary to fund their ongoing journalism predominantly from online advertising revenues.

"The print channel will benefit from the creation of a strong, print-invested entity that will be motivated to continue to improve the print offering to differentiate print from digital, in order to continue to attract the maximum number of consumers who may prefer that format. It will also benefit more broadly from the merged entity's investment in quality journalism for digital audiences."

Fairfax NZ's Australian parent, Fairfax Media, will be poised to emerge with a stake in NZME if the merger proceeds.

The final structure of the deal has yet to be concluded but it is currently proposed that NZME will issue shares and cash to Fairfax Media in return for its NZ assets. The NZME board would continue to comprise a majority of independent NZ directors.

Rationale for the merger

• Provide an opportunity to deliver a market-leading offering, rich in both local New Zealand and internationally focussed content, to engage more consumers and advertisers in the New Zealand.

• Support the investment required to maintain and continue to improve the quality of local and regional news, life and style, sport, and entertainment content.

• Adapt their businesses to deliver advertising customers more targeted, lower cost, higher rate of return on investment, more data rich and diversified offerings to compete with other digital media offerings.

• Manage the reduction in demand for traditional format newspapers, while continuing to deliver high quality news/information content to consumers across print and digital formats (and, in NZME's case, radio).

Next steps

•Commerce Commission will issue a timetable for merger approval.

•Commerce Commission will release statement of merger issues.

•NZME will demerge from its Australian parent APN.

•NZME will list on NZX and ASX in late June.

• If the Commerce Commission approves the merger, Fairfax NZ's assets will be folded into NZME.

•Fairfax will then take a shareholding in NZME.