King in his Domain
Townsville THE takeover battle for Fairfax Media has thrown the spotlight on an amazing reality – that arguably the single most important asset in the $ 2.8 billion group is a single person.
It’s not the printing presses, it’s not the mastheads, far less, the content in them, which in times past made even prime ministers tremble ( and jump).
It’s not even in a sense the group’s most profitable business – its Domain real estate advertising – but the individual who essentially built it and is now its CEO, Antony Catalano.
Now my colleague at The Australian newspaper, John Durie, has argued that he should be stood aside pending a resolution of the takeover battle between two Wall St assetstripping main- chancers.
I could not disagree more vehemently; that would run the very real, the very serious, risk of destroying or at least devaluing not simply Fairfax’s most valuable asset but the only thing that has prompted the two takeovers.
Trust me, nobody – and I mean nobody, not even the foreign media proprietors who have shown varying degrees of interest in the past – now wants to buy Fairfax in order to run a newspaper business.
The sole and only interest is Domain and its revenue streams. So why don’t I describe IT as the major asset, but its CEO instead? Surely, you just get another CEO?
There are two reasons that Catalano is “the asset”.
First, he basically built it. Arguably, if there’d been no Catalano inside the Fairfax building these past dozen or so years, there’d be no Domain and either no Fairfax or at best a Fairfax worth in the hundreds of millions and not the $ 2.8 billion or so being offered.
Successive Fairfax boards and managements have learned “the Catalano lesson” at their cost. As the ( only) rational Fairfax paper, the AFR, itself detailed earlier in the week, after booting Catalano in the early 2000s, Fairfax had to buy him and his real estate advertising business back.
That points to the even more potent second reason not to boot him a second time: the risk – the near- certainty – that he would build a competitive business again, destroying or dramatically reducing any value left in Fairfax.
Durie’s argument was that Catalano was “hopelessly conflicted” because he’d spoken with one of the competing bidders, TPG.
According to Catalano, TPG wanted an assurance that he would stay with Fairfax post- takeover. “They ( TPG) said if I wasn’t interested in staying, they weren’t interested in spending any more time looking at the business,” he was quoted as saying. Two big and rather basic points. First, all TPG was doing was the most basic “due diligence”, but due diligence in the context of 2017, where IP – intellectual property – and the actual real people who possess it are just as, and in some cases and this is one of them, even more important than physical assets like plant, equipment, land or even conventional intangible assets like mastheads.
It is the most anodyne practice to do “due diligence” on conventional assets; TPG just did it on a different ( and the most important) asset.
It is clearly in the best interests of Fairfax shareholders that Catalano was, first, prepared to answer; and secondly, that he answered positively.
It preserved two bidders ( in what is at best a very thin bidding war, precisely because all the value rests on Domain and Catalano). As anyone who’s gone to a property auction knows, two bidders are better than one.
“Any other company chair who found out a senior executive was talking up a bid for the company from an outside player would immediately stand him down,” Durie argued – seemingly never to have heard of management buyouts.
Personally I would agree with Durie that it is – or more realistically, that it should be – completely inappropriate for executives to join with outsiders to take over the company.
Executives and especially CEOs are paid very big salaries by and to work for the company’s owners, the shareholders.
Self- evidently they have the ultimately most valuable inside information – understanding the real granularity of the business and even more importantly where the business can be taken. Joining with an outside bidder is intrinsically problematic.
But whatever, I/ we lost that argument decades ago. We have seen MBOs galore over the years, including in Australia, and nobody seems to blink.
Not that, to stress, there is any evidence that Catalano was doing any of this – rather that he simply responded to a TPG query, and responded in a way that was in the interests of Fairfax shareholders.
Although this not an MBO, Catalano as the key executive would get equity in a successful TPG takeover; and indeed, I would suggest, in the competing Friedman and Hellman bid if it succeeded.
Again, that’s perfectly normal in takeovers where acquiring companies want to first keep and then incentivise key executives.
Fairfax though is at least uniquely interesting if not unique, where two bidders are ostensibly offering $ 2.8 billion or so for a media company where the actual “media business” is close to being worthless.
Yes, it’s always the case that the “value” in any company resides in the revenue streams; and with Fairfax the key revenues streams were always its classified advertising.
But, in the good old days these revenue streams were tightly bound to the eyeballs of the readers of the papers.
That’s no longer the case. It’s not simply that the eyeballs have drifted elsewhere, the two are no longer necessarily linked.
Seek, which dominates employment ads, and Carsales in its space are not tied to “media eyeballs”: they exist on their own focused, purely ad- driven audiences.
Fairfax used to “own” all three streams. The only reason they still have one – and even that one is shared with this organisation’s REA – is arguably because current CEO Greg Hywood bought an asset called Catalano.