FAIRFAX MEDIA is selling its remaining stake in the New Zealand online auction house Trade Me in a move that will eliminate most of the company's debt.
Investment bank UBS has been appointed to sell the 51 per cent stake in Trade Me to institutional investors at about $3.05 a share.
The deal will yield more than $600 million for Fairfax - publisher of The Sydney Morning Herald and owner of The Age - which paid $NZ700 million for the entire business in 2006.
Details of the transaction are expected to be announced on Monday.
It is believed the sale is designed to take advantage of Trade Me's strong market performance since being spun off as a separate listed entity in December last year at $2.07 a share.
Independent media commentator Peter Cox said while Trade Me had a big market share in New Zealand its rate of growth was slowing in a maturing market.
"Though I agree that you are looking for businesses for the future that are internet-based where there can be high rates of growth, I would suggest that this one has probably seen its best days now," Mr Cox said.
"Therefore if they can get what they feel to be a very good price for it, then definitely they should consider selling it."
Mr Cox ran unsuccessfully for a seat on the Fairfax board at November's annual meeting.
Fairfax's full-year accounts said Trade Me had a "somewhat variable performance" over the second half of 2011-12.
Fairfax sold 34 per cent of its Trade Me stake into the public offering and offloaded a further 15 per cent in June this year.
That June sale of its Trade Me stake netted Fairfax $422 million, most of which was used to pay down debt.
Shares in Trade Me, which dominated New Zealand's online auction market, now trade at more than 20 times the company's expected earnings for the current financial year, according to Bloomberg.
Fairfax reported net debt of $815 million as at June 30 this year, excluding $99 million of debt associated with Trade Me, and the company reduced its net debt by $574 million last financial year.
Last month, Fairfax sold its US agricultural media business for $US80 million cash, which was also used to pay down debt.
Should the Trade Me sale be finalised this week, then Fairfax Media's net debt - which stood at $2.5 billion in 2008 in the wake of the Rural Press merger - should fall below $200 million.
The Trade Me sale has the support of some of Fairfax's major institutional shareholders, including Allan Gray, Lazard and Maple-Brown Abbott. Representatives of the company's largest shareholder, Gina Rinehart, also reportedly said Ms Rinehart supported the transaction.
The sale will, however, deprive Fairfax of a key source of digital earnings, as the business implements a new digital strategy in 2013 amid a tough advertising market.
At the company's shareholder meeting in October, Fairfax chief executive Greg Hywood reported that revenue for September and the first few weeks of October were 7.5 per cent below the corresponding period for the prior year. He said "it is impossible to make projections from here", but added that the company was managing these structural and cyclical challenges.
This year, Fairfax announced plans to cut more than 1900 staff and take about $235 million in structural costs out of the business. This includes plans to close its largest print plants in Sydney and Melbourne, turning the Herald and The Age into compacts, and introducing a metered model to charge digital subscribers for access to these mastheads.
At the shareholder meeting, Fairfax chairman Roger Corbett said a break-up, or demerger, of the core media business was ruled out after detailed analysis as it would not add to shareholder value, and would undermine future value creation.
Media companies continue to do it tough. Ten announced a $230 million capital raising earlier this month - its second since June - as advertising revenue continued to slump. And last week, APN News & Media shares hit record lows after it said underlying earnings for the current year could be down 34 per cent from the previous year if current trends continued.
OTHER ASSETS
Newspapers: Australian Financial Review, The Age, Sydney Morning Herald,
Radio: 2UE Sydney, 3AW Melbourne, 1278 Melbourne, 4BH Brisbane, 4BC
Brisbane, 6PR Perth, 96FM Perth
Digital: RSVP.com.au, Stayz.com.au, Australianpropertymonitors.com.au,
Countrycars.com.au
As of June 30, 2012
Fairfax net debt (excluding Trade Me) =$815m
Expected proceeds from sale of Trade Me =$600m
Frequently Asked Questions about this Article…
What exactly is Fairfax Media selling in the Trade Me sale?
Fairfax Media is selling its remaining 51% stake in New Zealand online auction house Trade Me. Investment bank UBS has been appointed to sell that stake to institutional investors at about $3.05 a share.
How much money will Fairfax receive from the Trade Me stake sale?
The deal is expected to yield more than $600 million for Fairfax. The article notes expected proceeds from the sale of Trade Me at $600 million and that a previous June sale of a Trade Me stake netted Fairfax $422 million.
How will the Trade Me sale affect Fairfax Media’s net debt position?
Fairfax said the sale will eliminate most of the company’s debt. As of June 30, Fairfax reported net debt of $815 million excluding $99 million of debt associated with Trade Me; if the sale is finalised, net debt should fall below $200 million (compared with $2.5 billion in 2008).
Why is Fairfax selling Trade Me now instead of keeping it?
The sale appears aimed at taking advantage of Trade Me’s strong market performance since it was spun off last December at $2.07 a share and is trading higher now (around $3.05). Some commentators also suggested that while Trade Me has strong market share, growth may be slowing in a maturing market, so Fairfax may consider selling if it can get a very good price.
Who supports the Trade Me sale and who is handling the sale process?
UBS has been appointed to handle the sale to institutional investors. The transaction reportedly has the support of several major institutional Fairfax shareholders, including Allan Gray, Lazard and Maple-Brown Abbott, and representatives said Fairfax’s largest shareholder, Gina Rinehart, also supported the deal.
What are the investor implications of Fairfax losing Trade Me as a digital asset?
Selling Trade Me will deprive Fairfax of a key source of digital earnings at a time when the company is implementing a new digital strategy in 2013 and facing a tough advertising market. For context, Fairfax reported revenue for September and the first few weeks of October was 7.5% below the corresponding period last year.
What other asset sales and cost actions has Fairfax taken to reduce debt?
Fairfax previously sold 34% of its Trade Me stake into the public offering and offloaded a further 15% in June. It also sold its US agricultural media business for US$80 million cash, which was used to pay down debt. Last financial year the company reduced net debt by $574 million and announced plans to cut more than 1,900 staff and remove about $235 million in structural costs.
How is Trade Me valued in the market and what does that mean for investors?
According to Bloomberg cited in the article, Trade Me shares were trading at more than 20 times the company’s expected earnings for the current financial year. That higher valuation reflects market enthusiasm since the spin-off, but some commentators warned growth may be slowing in a maturing New Zealand market, which is a consideration for investors assessing the price.
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