TERRY MCCRANN

THE Nine-Fairfax ‘merger’ is caught in a pincer of its own making that might prove impossible to break free from. It turns essentially on whether it really is a merger or a takeover – of Fairfax by Nine.

On the deal’s unveiling last Thursday it was sold on two core bases. First, that Fairfax shareholders would get Nine shares (and some piddling cash), which added to a premium of 22 per cent on the 77c at which Fairfax had last traded.

Then, secondly, that the post-union upside – to the merged business and so to the future Nine share price – would be delivered via the ‘digital dynamic’ offered by Fairfax’s 60 per cent owned Domain real estate advertising business and the shared Stan video streaming business.

Well, the first was immediately undercut when the Nine share price promptly dropped 14 per cent, from the pre-bid $2.52 level to $2.19.

Suddenly the premium offered to Fairfax shareholders had dropped to a derisory 6 per cent or so. It looked even thinner in actual monetary terms – just 5c per share.

This week, Nine has recovered a tad. But at $2.24 the supposed premium being offered is still just 9 per cent or less than 7c for each Fairfax share.

And there’s literally months of exposure to the vagaries of the Nine share price specifically and both the broader Aussie and US markets until any accepting Fairfax holders get their hands on Nine paper.

And so to the perhaps irreconcilable problem: Nine wants to get its hands on Domain and the 50 per cent of Stan that Fairfax owns.

That’s the point and the problem – Fairfax owns them, so shouldn’t Nine be paying a hefty premium? Something not only considerably higher than 9 per cent; but further, a premium that can be ‘taken to the bank’, not dependent on (or at least, not overly dependent on) the vagaries of the market?

But the takeover/merger is very finely balanced. Nine has to almost double its capital – with the operative word ‘almost’: Nine shareholders will – just – keep majority ownership of the enlarged group with 51 per cent; Fairfax holders end up with 49 per cent.

If Nine puts more paper on the table, the balance would swing to Fairfax holders: who’s taking over – sorry, who’s merging with – whom? So who should be chairman and CEO?

But worse, once Nine starts putting more paper on the table it runs the risk of accelerating the fall in its share price. It could end up offering ‘more’ but not really paying more. The alternative is to add more cash. The current 2.5c a Fairfax share is only going to cost $57 million; going to 5c would up the cost to $114 million.

The danger is that the extra debt would start to make investors – in both companies – a tad nervous; especially given how quickly and how far the Nine share price has run up this year. Before, of course, the ‘merger’ proposal. That would also bring into clearer, and unsettling, focus that the key asset – Domain – is only partly owned.

Interesting.