The Nine/Fairfax merger, which still requires Fairfax shareholder approval, court approval and no regulatory intervention, has drawn plenty of attention.
The good news
The deal makes strategic sense on paper. A combined Nine/Fairfax creates a formidable national advertising platform and arguably a strengthened editorial position, as content is cross-promoted across TV, newspapers, radio and online.
Also, there are obvious synergies from combining media companies that have complementary assets and staff who are can work across different media channels.
Moreover, both companies needed to do something to grow. Stakeholders might not like the thought of losing the Fairfax name or having a TV station in charge, but what choice does Fairfax have and what are better options? Done well, a Nine/Fairfax takeover buys time.
The bad news
That’s the good news. The bad news is that putting two challenged businesses together rarely makes a winner. Structural forces weighing on Nine and Fairfax will only intensify: people watching on-demand programming and shunning live TV; consumers who will not pay for newspaper content; Facebook and Google dominating advertising markets; and Netflix dominating on-demand TV content.
The extent and timing of synergies is another issue. Nine’s (NEC) expected $50 million in cost savings over two years is not hugely material, given the size of the deal. I suspect many analysts and fund managers do not fully understand the strength of Fairfax’s (FXJ) culture and how change-resistant it is (rightfully so) on issues that threaten editorial independence.
To its credit, Fairfax has done a good job adjusting its workforce to media-industry realities and finding savings. Staff seem far more accepting of change than when I last worked at Fairfax full-time a decade ago. But I would not be surprised if Nine has underestimated the cultural conflicts between commercial TV and a newspaper group built on editorial independence.
The other issue is deal funding. As Thorney Investment Group’s Alex Waislitz reportedly noted, Nine is using scrip in an old media company – after a strong price rally in the past 12 months – to own a media company whose fortunes are tied to new media (through Fairfax’s 60% stake in Domain and the Stan joint venture with Nine). That’s good for Nine shareholders in the long run, but not as good for Fairfax investors at the bid price.
The verdict
I cannot get excited about Nine or Fairfax. Nine looks fully valued: the consensus price target of $2.36 is just ahead of the current $2.30. Fairfax has some short-term appeal due to the prospect of another bidder emerging, but suits traders or active investors who punt on takeovers.
To my thinking, Domain (DHG) has most to gain from a Nine/Fairfax tie-up. Nine’s stake in Domain (if the Fairfax deal passes) provides huge incentive to cross-promote the life out of the online property services business. Extensive cross-promotion through Fairfax helped Domain build a challenger position to REA Group. With a high-rating national TV network behind it, Domain could have huge marketing tailwinds.
Presumably, Nine’s hit reality show, The Block, would promote Domain at every opportunity, there could be spin-off Domain-branded TV shows around prestige property and so on.
Moreover, Nine could help Domain address a key challenge: building its market position outside Sydney and Melbourne. Fairfax is strong in both markets through the Sydney Morning Herald and The Age, but the absence of a printed newspaper in other States (excluding the Australian Financial Review) means Domain has not had the same marketing free-kick.
Domain has a new CEO and the share price jumped 9% on the Nine/Fairfax news. Trading on a prospective PE of about 31 times FY19 earnings, Domain looks fully valued. The main risk is an acceleration in the property slowdown and a sharp decline in listings. I envisage a gradual price slowdown rather than a crash in capital-city property prices.
Of the three stocks, Domain looks the best value and has the best growth prospects. It will benefit less from cost-saving gains through a merger (being a standalone business) but the potential of cross-selling property ads and cross-promoting content through the Nine/Fairfax platform is significant.
A consensus price target of $3.36 suggests Domain is moderately undervalued at the current $3.19.
Chart 1: Domain Holdings Australia (DHG)
Source: ASX
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