Nine Entertainment will acquire Fairfax Media in a cash and scrip $4.2 billion takeover that the companies say will allow them to challenge Facebook and Google and potentially trigger a further wave of mergers and acquisitions in the local media sector.
“We all know media is changing, inevitably and constantly. And this deal is not about where media has been. It is all about where media will be in the future,” said Nine chief executive Hugh Marks, who will head the merged media group to be called Nine.
By putting the two companies together, the assets of the merged entity – which will be chaired by former treasurer Peter Costello – will include free to air television, newspapers, including The Australian Financial Review, radio, and full ownership of streaming service Stan, a competitor to Netflix.
It will also deliver Nine a 60 per cent holding in Domain, which analysts consider the “jewel in the crown” of the transaction.
Fairfax and Nine to merge
Neither sides of politics are opposed to the deal, which follows the removal of the “two out of three” rule, which prevented one company from owning a TV network, radio station and newspaper in the same market.
Prime Minister Malcolm Turnbull said the deal would make two strong Australian brands more secure while Bill Shorten said it remains to be seen if the merger was positive or negative.
“To be frank, I welcome the announcement,” Mr Turnbull said on Tasmanian radio.
“I think it will strengthen both of them as television and online and print journalism.”
The deal requires approval from the Australian Competition and Consumer Commission, which is conducting an inquiry into digital platforms.
Under the proposed cash and scrip transaction, Fairfax shareholders, who welcomed the deal and said it could mark the start of more media consolidation, will get 0.3627 Nine shares and 2.5¢ for each Fairfax share they hold.
“The ability to cross-sell is enormous,” says Wilson Asset Management’s Chris Stott, whose fund owns both Nine and Fairfax shares.
“Our view is the cost and revenue synergies of the combined group will be north of $100 million.”
The companies have said they expect to deliver annual cost savings of at least $50 million over two years, mainly by taking out overlapping roles which are not in editorial.
Mr Hywood, Fairfax’s chief executive, said the deal will deliver “scale, offering, digital capacity, and opportunities like no other in the region”.
Nine first approached Fairfax Media on July 9, and the board, led by Nick Falloon, quickly recommended it to investors.
In the past year, Nine shares have rallied as advertisers shift back to more traditional advertising, as Nine built up its digital content and delivered strong programming.
Mr Hywood said Fairfax had also demonstrated the value of its assets beyond Stan and Domain, noting metro revenues growing for the past three halves.
“I think industrial logic of media scale and what you can do with that media scale is a well accepted principle in the media at the moment. That’s not a hard sell,” Mr Marks said.
“It wasn’t something we wanted to take a long time, and be drawn out in the sense of other people taking control of the agenda.”
He added that Nine, which has seen its shares rise nearly 50 per cent in the year to date, wouldn’t have been able to make this offer 12 months ago.
Mr Hywood, who will leave the group, said this was the first real deal that had been put on the table following the cross-media changes.
“Everyone has been talking to everyone all the time, but there’s never been a deal you could actually contemplate [before this]”. He told a staff briefing in Sydney that “the shoe is on the other foot. I am here announcing my redundancy for a change”.
Last year, Fairfax received approaches from private equity firm TPG and US-based private equity fund Hellman & Friedman, though both walked away.
Following the approaches, Fairfax spun out Domain into a separately listed company though it retained a majority holding. Within months of listing, chief executive Anthony Catalano left the company.
At the staff briefing on Thursday, Mr Hywood said people had “written us off” and he was proud to recommend a deal at a premium to the last close that would was the result of a focused strategy and strong execution to build new products, like Domain and Stan.
In response to a series of questions about editorial independence, he stressed that a stronger commercial company would mean more resources would be channelled into journalism and said the NIne board would sign the company’s charter of independence.
Both Mr Hywood and Mr Marks dismissed the idea of merging newsrooms.
“You don’t want any of the assets you’ve got to be degraded. You want them to all be successful,” said Mr Marks.
“This notion everyone has to work together and be part of one big newsroom, that’s exactly the wrong way to go … where we can make a difference is the commercialisation of that content.”
Mr Marks said good content drives engagement with audiences and the combination of Nine and Fairfax will create a stronger business which can invest in more content.
“I think about each of them as their own business and what they do is their own business. How that will contribute to an organisation is a scale of audience,” he said.
“The mastheads are a really important part. They’ve got a great reputation, great history, good people … and growing digital audiences.”
Thorney Investments’ Alex Waislitz said acquiring Domain using old-media scrip was a particular clever move by Nine, and questioned what the new board would do with the outstanding 40 per cent of Domain that is not owned by Fairfax.
“The interesting thing is Nine is using fairly priced scrip for old media assets for a 60 per cent share in a platform driven by digital technology in an exciting space,” he said.
“When Catalano was running it we thought there was a $1 billion of increased value … now the question is, will Hugh Marks put the right person in place to capture that? Maybe the new board’s approach is to buy it back. Who knows?”
Domain shares rose more than 9 per cent on Thursday to close at $3.35.
Ausbil Investment Management’s Paul Xiradis, whose fund is the largest institutional shareholder in Fairfax Media, said the deal made sense.
“I’m still going through it, it wasn’t totally unexpected that something was going to happen. It makes good commercial sense, and there are going to be benefits for both,” he said.
“Clearly on a combined basis there are going to be substantial synergy benefits … I think it’s clearly in cross promotion and in news and editorial, in particular.”
Westpac chief executive Brian Hartzer said after delivering a lunch-time speech to the American Chamber of Commerce that he didn’t see why editorial quality would be impacted by Nine buying the company.
“Equally, I can’t see why that merger would necessarily come at the detriment of that. Media requires on the delivery of quality products, and one of the many factors for someone buying Fairfax is the quality of its journalism,” he said.
Fairfax had signed a heads of agreement to move its Sydney headquarters to ISPT’s 477 Pitt Street but that is now uncertain.