Hot Media Stocks

The release of a much anticipated discussion paper on media reform, with the promise of relaxed cross-ownership rules, prompted a frenzy of stock buying yesterday.
Changes proposed by Communications Minister Helen Coonan included the removal of some ownership limits for local and foreign media companies. This would offer economies of scale and so make some media companies key targets and therefore good investment opportunities.

The accompanying chart shows three companies received special attention yesterday. Fairfax, Ten Network and Southern Cross Broadcasting have all underperformed in recent years, which is reflected by their low price/earnings (P/E) multiples.

They could make for natural acquisitions by other companies, such as News Limited, Publishing & Broadcasting and Macquarie.

However, in recent years there have been some telling decisions made by all of these companies that suggest their interests and core businesses are no longer as clear-cut as they once were.

News Limited has declared that the online environment is a major focus, invested heavily in key online properties and incorporated itself in Delaware. Publishing & Broadcasting has established a very strong presence online in Australia but at the same time is investing more in its casino interests. Fairfax, in an attempt to shore up its diminishing stream of classified revenue, has begun to snap up auction and dating websites, which although popular remain niche.

The Australian media is also likely to be increasingly shaped by digital services, whose development is being stalled by several factors.

Helen Coonan’s discussion paper suggested that multi-channelling (existing TV stations broadcasting on more than one channel) would not occur until analogue transmissions cease between 2010 and 2012. Seven Network is one of the few interested in providing these services now. Seven broadcast a special digital channel devoted to tennis during the Australian Open.

High-speed internet can also offer this type of content, but only if Telstra agrees to build a new network, something it has refused to commit to until the Government agrees to it setting its own rules and fees.

The immediate environment for traditional media looks ripe for a shake up, and to shake down anyone pursuing digital. Expect the same players to provide the same services, perhaps with fewer resources. The challenge for investors is to identify the companies with the most potential for a takeover or a merger and get in ahead of the moguls.