Small bites leave Fairfax besieged

John Singleton and Mark Carnegie have only taken small positions on Fairfax's register but their alliance with Gina Rinehart makes the group's restructure highly vulnerable.

Over the past few days column metres of newsprint have been devoted to a $1.7 million or so acquisition of shares. Even given that it is a quiet period for news, that’s an inordinate amount of attention for such a small transaction.

The fact that the purchase involves Fairfax Media, that the buyers are a couple of high-profile, even colourful investors and that they have teamed up with a very serious Fairfax shareholder, Gina Rinehart, of course, guaranteed their emergence on the Fairfax register would generate attention out of all proportion to a 0.15 per cent shareholding.

John Singleton and Mark Carnegie bring to the Fairfax table something that Rinehart doesn’t have, experience and some credibility as media proprietors. Both have long dabbled in media investment (Carnegie was a founding shareholder in this masthead before it was sold to News Ltd last year and Singleton was once a director of Fairfax) and they control the Macquarie Radio network.

While it is obvious, given that they unsuccessfully bid more than $200 million for it in 2011, that Fairfax’s radio network is one of the reasons for their interest in the group, if it were the only reason they could have tabled another, lower, offer for a business whose earnings nearly halved last year.

Fairfax’s recent sale of its residual 51 per cent of its best asset, Trade Me, for gross proceeds of $616 million, demonstrated its willingness and/or need to cash out non-core assets. And its attempt to sell the radio stations in 2011 was a statement in itself of the Fairfax view of their non-core status within the group.

The formal and legal alliance with Rinehart and her 14.9 per cent shareholding in Fairfax suggests a larger agenda and a more substantial threat to the existing Fairfax board and its agendas than the size of the shareholdings might suggest.

The Rinehart camp have made no secret of their view that Fairfax needs to sell more assets, even though the Trade Me sale (and the earlier sale of its US agricultural publications) has left the group with only token levels of net debt.

There are shareholders on the register that appear to share that view, notably the Allan Gray funds management business headed by Simon Marais, which owns about 11 per cent and Lazard Asset Management, which owns just over 6 per cent.

The Fairfax board has been able to keep Rinehart at arm’s length, but a coalition that included Allan Gray, Lazard and a slightly bigger holding by Singleton and Carnegie would be far more threatening.

Singleton and Carnegie bring that required greater credibility in terms of understanding of the media and deal-making capabilities.

Apart from its radio network Fairfax has regional newspaper businesses in New Zealand and Australia that could be hived off, as well as community publications in metropolitan Australia. It also has some stand-alone digital businesses, although they are part of the ‘’Fairfax of the Future’’ strategy that sees its major mastheads as portals to flow traffic past digital transactions businesses.

There is a view that a comprehensive break-up of Fairfax could release significantly more value that its 51.5 cent share price (which has edged up since the Singleton/Carnegie/Rinehart alliance was revealed) might indicate.

Fairfax itself, however, has said that it studied the break-up options intensively, with considerable external advice, and concluded that it would be value-destructive because it would reduce the group’s ability to bundle brands and platforms and offer cross-media solutions to advertisers and would also generate significant costs and dis-synergies.

The core problem, however, is that breaking up the group would probably undermine its ability to continue to fund the Fairfax of the Future strategy for its metro mastheads – The Sydney Morning Herald, The Age and The Australian Financial Review – and create at least the potential for their transition into a purely digital future.

Fairfax isn’t prepared, or able to countenance, the complete write-off of its two big broadsheets.

The group is on the brink of radical change in the nature of the two core mastheads. They will move to tabloid formats this year and it will introduce paywalls to the online sites. Subsequently Fairfax will transfer printing of them to its regional presses, shutting down and selling its Chullora and Tullamarine printing plants.

It has also looked at ending physical production of the papers completely, which it has said would cost at least another $200 million on top of the $248 million of costs the restructuring has already generated.

The Trade Me sale has been interpreted by some in the market as a signal that Fairfax has concluded that the existing restructuring plan isn’t, against the backdrop of a very difficult advertising environment, delivering sufficient cost reductions fast enough and that Fairfax needed more cash to fund another layer of cost-cutting.

If the new allies weren’t concerned about the fate of the metro mastheads, or had a benevolent billionaire willing to write some big cheques to prop them up, an aggressive break-up strategy might release some significant value.

Fairfax, beset by the extreme structural and cyclical pressures that have destabilised most traditional media, is highly vulnerable to an agenda that promises short-term gains for shareholders, even if that compromises the attempt to save the venerable broadsheets.

By herself Rinehart, despite being Fairfax’s biggest single shareholder, found it impossible to shape the group’s direction. She couldn’t (because she refuses to endorse the Fairfax charters of editorial independence) even get into the boardroom.

Her new allies, however, could be catalysts for the formation of a broader group of like-minded shareholders agitating for a very different strategic agenda to the complex and delicate one Fairfax is trying to pursue. Fairfax would be very aware that the minuscule size of their shareholding is not a meaningful indicator of the potential threat posed by the newest additions to its register.

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