Risky buy on pa­per

Townsville Bulletin - - NEWS -

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.

NUM­BERS CRUNCH: Fair­fax chair­man Nick Fal­loon has his work cut out for him.


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