Floundering Fairfax fails to inspire

Talk of a Fairfax break-up was scuppered today as the company maintained such a move would destroy rather than enhance shareholder value. The group's restructuring is its last and best hope.

Fairfax Media chairman Roger Corbett says the embattled group has ruled nothing out and remains opportunistic and flexible with respect to shareholder value-enhancing transactions. Unfortunately, however, his address to today’s annual meeting and that of his chief executive, Greg Hywood, make it clear Fairfax doesn’t at this point actually have value-adding options.

Allan Gray’s Simon Marais has, as one of Fairfax’s major shareholders, been calling for a break-up of the group or a merger with another media player like APN.

Corbett, however, made it plain today that his board and management had looked at the break-up option, with asset sales and a de-merger of its troubled metro media business and concluded that it would destroy rather than enhance shareholder value.

The costs, the loss of synergies, the creation of negative synergies, the need for cash reserves in the metro business to support continued restructuring and the implications for the borrowing capacity of that business argued against that option.

In fact the conclusion was obvious. Fairfax has about $1 billion a year of revenue and more than $100 million of earnings before interest, tax, depreciation and amortisation tied up in what is an integrated metro print and digital business that includes and supports its digital transaction businesses.

If there is to be any recovery, however modest, of the massive amounts of shareholder value that has disappeared from the group in recent years – or the avoidance of even greater pain – it can only lie within the substantial digital audiences the group has created.

That may be a long shot but it is the only alternative to an otherwise slow (or perhaps not so slow) path to oblivion for a group that otherwise has (with the exception of its 51 per cent shareholding in Trade Me) a collection of Old World media businesses that will, at differing rates, inevitably be undermined by the accelerating shift to digital media.

Merging with an APN might generate some near term synergies but would simply swell Fairfax’s existing over-exposure to the declining old media assets. It would be a continuation of the diversification strategy Fairfax had previously been pursuing, which reduced its reliance on the metros but vastly increased its exposures to old media businesses.

Hywood, speaking at the meeting, produced what was probably his clearest articulation of the current Fairfax strategy.

‘’We are structuring our business so that as the shift from print to digital continues we will seek to maximise cashflows from the metropolitan business,’’ he said. While there was cash flow from the print mastheads Fairfax would continue to produce them but if demand for newspapers declined the group would print less of them. It wouldn’t subsidise the metros from its other businesses.

In other words Fairfax will milk the newspapers for cash for as long as it sensibly can while positioning itself for a digital-only future. The size of its digital audience offers it its only hope of any kind of a viable future for its metro mastheads.

While Hywood said the growth in the group’s digital revenues put it within reach of a digital-only model, and while the costs within a digital model would be substantially lower than within Fairfax today, yields online are a fraction of those Fairfax still enjoys in print, the online environment is far, far more competitive and managing the group’s cost base down perfectly in line with the demise of print without undermining the digital businesses and their growth will be an extraordinarily difficult and delicate task. Many would argue it is an impossible one.

There is, however, no obvious alternative, which is why Fairfax is engaged in continuous, deep and traumatic cost-cutting and restructuring within the metro mastheads.

The impacts of the structural noose that keeps tightening around the group have been exacerbated by the cyclical downturn in advertising. That downturn appears to be continuing even if the rate of decline appears to have become slightly shallower in the past few weeks.

Where Fairfax’s revenues were down 10 per cent in the first six weeks of this financial year, Hywood said today they were now 7.5 per cent below last year’s during the first weeks of October, which is only marginally less discouraging for Fairfax shareholders.

Hywood’s strategy represents Fairfax shareholders' last and best hope for salvaging something from the wreckage of the print media industry occurring around the world. Had Fairfax responded to the changes in its industry occurring earlier his prospects of success might have been somewhat better and he may have had more options and time. As it is, Fairfax is out of options and time is also running out, hence the urgency and the radical nature of Hywood’s restructuring.

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