Testing the airwaves for a Fairfax tie-up

Combining radio assets would be a coup for Fairfax and Macquarie. But it’s hard to look past Domain as the more important strategic pillar for Fairfax’s future.

There is significant buzz in the air with rumours that Fairfax may merge its local radio assets with competitor Macquarie Radio Network.

The idea was that operating savings could be obtained – particularly within sales, marketing and administration – by combining the two entities. The combined entity would also become home to the dominant AM station in each market.

Macquarie Radio Network’s majority owner, John Singleton, wanted to buy Fairfax’s radio assets two years ago for a reported $200-$250 million. Fairfax said no. Fairfax had purchased the radio assets alongside television production house Southern Star in 2007 for $440 million. In 2009 it sold Southern Star for $75 million.

Valuing a combined Fairfax and Macquarie asset is difficult. With revenue in financial year 2013 of $57.4 million, MRN has a current market cap of $82 million. For the 2013 financial year its EBIT eclipsed $12 million and its largest asset outside of trade receivables was a $20 million allocation to radio licences on its balance sheet. Fairfax is carrying $121 million on its balance sheet for radio licences, and in 2013 the broadcasting division saw revenue increase 8 per cent to $105.1 million and EBIT increase 37 per cent to $15.5 million.

A very crude like-for-like valuation of Fairfax’s radio business based on the current state of MRN could value it at around it around $195 million once the value of radio licences are factored in. However, the usefulness of this is limited as 2013 saw Fairfax’s radio business acheive impressive growth of around 8 per cent, while at the same time MRN saw revenue dip by the same percentage. Morgan Stanley has stated it believes the Fairfax radio assets could be worth between $167 million and $297 million.

Given the strong 2013 performance of the Fairfax radio assets, its most likely Macquarie that has the most to gain from a consolidation of stations. It’s also unclear how motivated Fairfax is to dispose of its radio business, and what price would be required to make it happen. Keep in mind that based on the $440 million paid for the stations and the Southern Star business (which was valued at $100m), the real price Fairfax paid just six years ago for these stations was around the $340 million range. It is unlikely it would take a $100-150 million haircut on this given the radio business grew in financial year 2013 and the sector as a whole is proving more resilient than most presumed.

There’s no question that combining the two companies presents significant benefits. It creates a business generating over $150 million in revenue and over $25 million in EBIT. The combined asset would control the number one AM talk station in each major market, with numbers one and two in some. Sales and administration cost savings would be a significant addition to the bottom line, and the combined company could position itself as the go-to advertising partner for talk radio’s core audience, over 55s, a rapidly growing segment.

While the Fairfax/Macquarie tie up has some strategic merit, it’s hard to look past Domain as the more important strategic pillar for Fairfax’s future. There was talk earlier in the year about Fairfax possibly looking at spinning Domain into its own division as a precursor to floating the brand into its own ASX listed entity the future however nothing has eventuated as yet.

At Fairfax’s investor day earlier in the year it outlined the performance of the Domain business as it stood at that point in time – the digital component and the real estate classified print product within The Sydney Morning Herald, The Age and the Canberra Times. Combined Domain was contributing $41.5 million in EBITDA at a margin north of 33 per cent, total revenues up 18.5 per cent in the back half of the 2013 financial year. To put this in perspective, in terms of performance Domain in 2013 delivered seven times the EBITDA of the Financial Review Group with the same amount of revenue.

Domain is a great product competing head-to-head with another great product, Real Estate.com.au. Domain’s revenue of $127 million for 2013 is dwarfed by REA Group’s domestic revenue of $305 million for the same period, however Domain is hamstrung by its revenue being concentrated mainly within New South Wales and Victoria. Further investment is required for Domain to improve its presence in these markets and offer stronger competition to REA Group than its resources currently allow outside of New South Wales and Victoria.

The performance of Domain over the past two years must give the Fairfax board confidence that the time is right to double down and give Domain a real shot at realising the potential it has clearly demonstrated. In REA Group it has a formidable competitor delivering an excellent product, but it would be very interesting to see what a cashed up Domain can do. Here’s hoping the cost savings engineered by Hywood and his executive team free up the cash to make this happen.

Ben Shepherd is a media and technology consultant. He can be found on LinkedIn and on Twitter.