Risky buy on paper
Townsville TWO lots of Wall St mainchancers can’t make the Fairfax Media group “work” for them at $ 1.20 a share and certainly not at the $ 1.30 directors wanted.
This is obviously “bad news” for Fairfax shareholders – the shares dropped straight below $ 1 – but oddly, not necessarily, narrowly, that bad.
The really bad news came more in the detail of why they couldn’t make it work; because it suggests that more conventional ( industry) owner- operators can’t make it work either.
Not at these price levels and not into the longer- term.
The “not- so bad” bad news turns on the fact these sorts of mainchancers have high, ahem, “benchmarks”. That’s to say, they are extra- greedy.
They precisely target “challenged businesses” like Fairfax, with uncertain futures and more uncertain values; and they absolutely intend to make huge profits in reselling them back to general investors.
What happens after that resale is entirely of no interest to them; especially whether the “quality” and “value” of the business they’ve resold “lasts” only as long as the equivalent of a used car warranty period.
Look at TPG’s last big buy- and- resell deal down under: Myer.
So on one level, all they are saying, to coin a phrase, is that they can’t see enough upside in Fairfax’s future; they won’t be giving this piece Down Under media a chance.
But, there could still be upside. These mainchancers would want to see a realistic prospect of earning at the absolute minimum at least 15 per cent per annum on their equity outlay; and preferably at least 20 per cent a year over the typical five years from buy to resale.
That’s, to stress, on the money they outlay; they are looking to at least double it and indeed preferably generate an aggregate profit of 150 per cent- plus, with a great deal of help from the leverage of low- interest debt.
It’s important to understand why they couldn’t see it working and what the Fairfax “alternative” – the Plan A – means.
Essentially Fairfax is two businesses: its Domain real estate advertising of and its scattered print- based media and radio. Clearly, importantly, Domain derives some significant leverage from its linkage to the two main mastheads.
In working out overall value going forward you have to calculate it as Domain growing and the rest shrinking. And further, how much it would cost to close the print and whether such closure would undermine or at least crimp the Domain value growth.
The mainchancers clearly concluded that not only wouldn’t the numbers work at $ 1.20, on their profit requirements; there was way too much risk in that future. And that’s Fairfax’s real problem.
This is because all that risk and uncertainty remains with the company’s “Plan A” alternative – to partially float off Domain, keeping 70 per cent and so continued consolidation of its profit; and also, critically, the linkages.
So we will just see more of what we saw in yesterday’s trading update from the company: Domain revenue up 10 per cent, with digital revenue up 22 per cent.
So non- digital Domain revenue – that’s to say, print – was shrinking; along with all the rest. Metro media down 12 per cent, other print down 11 per cent, radio down 5 per cent and NZ down 4 per cent.
That’s at best a company value going sideways; in truth, actually irresistibly shrinking. And that’s assuming Domain continues to bloom in its competitive space, and that Melbourne- Sydney property continues to boom.
That’s a lot of hope to build a $ 2.5 billion value on.