The trick in Fairfax's Trade

In the circumstances, where it experienced a second-half implosion in earnings within most of its core businesses, and despite the disfigurement of the numbers created by $650 million of write-downs, Fairfax Media produced an almost respectable result. The market, however, was focused on things other than earnings.

It is apparent that Fairfax's confirmation that it would partially spin out its star digital business, the Trade Me business in New Zealand, was what excited the market. Fairfax plans to sell 30 to 35 per cent of Trade Me to external investors and separately list the business. Former Fairfax chief executive David Kirk will be appointed chairman.

Amongst the general gloom which pervaded the Fairfax numbers, Trade Me stood out, with revenues increasing 11.5 per cent and earnings before interest, tax, depreciation and amortisation rising 9.4 per cent to about $79 million.

Spinning Trade Me out ought to release about $300 million for Fairfax and, if it can also land a buyer for its radio businesses that are currently on the market, it would release about $500 million to pay down about a third of its $1.5 billion of net debt.

The nomination of Kirk, the former chief executive pushed out of Fairfax by his deputy, former Rural Press CEO Brian McCarthy, in the wake of Fairfax's merger with that group, is itself interesting.

It was Kirk, not long after being appointed CEO, who made the best decision in Fairfax's recent history and bought Trade Me. He said at the time that if the heady acquisition price wasn't validated by future performance, he'd lose his job. It was, in spades, although he eventually lost his job anyway.

Kirk's tenure at Fairfax was characterised by a spate of acquisitions and the separate listing of Trade Me will provide it with the capacity and currency to make digital acquisitions of its own, unfettered by the defensive stance being adopted by its parent. Fairfax CEO Greg Hywood said today Fairfax would not make any major acquisitions, using the proceeds of asset sales to pay down its debt.

In that context, the decision to sell only a modest proportion of the equity in Trade Me, which will enable Fairfax to continue to consolidate Trade Me's earnings – and Trade Me represents about two-thirds of its online earnings – will create a growth vehicle and opportunity for Fairfax that it wouldn't otherwise be able to contemplate in its constrained circumstances.

Fairfax itself performed marginally better than its revised guidance had suggested, with EBITDA of $607.4 million – slightly above the $600 million it had forecast earlier in the year, albeit 5 per cent lower than the $639 million it generated last financial year.

Given the performances of its traditional core businesses, the $650 million of write-downs, largely non-cash, wasn't entirely unexpected, although it does appear that the losses relate mainly to write-offs of goodwill and the $3.3 billion value of Fairfax's mastheads has been left largely untouched.

Even with those write-downs Fairfax has headroom in its banking covenants – chief financial officer Brian Cassell said the group had an EBITDA buffer of $200 million and its ratio of net debt to EBITDA, at 2.4 times, is comfortably below the covenant limit of 4 times. Fairfax does, however, appear concerned about its debt levels, hence the intention of devoting the proceeds of assets sales to reducing them.

That concern presumably relates to the vulnerability of the traditional print-related operations to the weak and volatile economic conditions.

Fairfax's metropolitan media businesses experienced an 18.7 per cent decline in earnings, its specialist media businesses (mainly the Financial Review group) an 18.2 per cent decline, its printing operations in Australasia contributed 6.6 per cent less and its New Zealand media operations 11.1 per cent less. The Australian rural operations were more resilient, lifting EBITDA one per cent.

The performance of the Financial Review group (which is grouped with Fairfax's agricultural publications within specialist media) explains why it has had a change of leadership and consultants have been brought in. Its revenue was down 2.7 per cent but its earnings plummeted 51.7 per cent.

The second-half performances of the core Fairfax businesses generally might, however, explain the anxiety within the group. Regional media's earnings were down 8.1 per cent, printing 12.4 per cent, New Zealand media 29.4 per cent, specialist media 36.8 per cent and the metros 51.8 per cent.

Much of that slump in earnings would have occurred in the final quarter, and particularly May and June, when the severe decline in consumer and business confidence saw all media experience an abrupt downturn in advertising revenues.

Hywood said today that after a six per cent fall in fourth-quarter revenues, there had been some slowing in the rate of decline beyond the end of the financial year, with year-to-date revenues tracking about four per cent below the same period of last year.

His response to the conditions has been to launch yet another cost-reduction plan, this time aimed at pulling another $85 million of costs out of the group over the next two years, mainly from its printing and distribution operations. About $30 million of those cost cuts would flow from a hoped for rationalisation of those operations through a joint venture with News Ltd.

For Hywood, the headcount reductions in editorial earlier this year as the group outsourced much of its sub-editing function to Pagemasters and the planned assault on printing and distribution costs isn't driven by the current cyclical conditions but is about creating the appropriate cost base for print businesses that have shrunk considerably in recent years as Fairfax's classified revenues have shifted online. It is an attempt to respond to the structural changes buffeting print media globally.

The impact of the economic and industry conditions on the group, and Hywood's statement that there would be no major acquisitions this year probably means that, with the exception of whatever Trade Me can deliver, it will be difficult for him to make any real progress in pursuing his strategy of leveraging off the audiences Fairfax has created online by bringing them next to its own digital transaction businesses.

For that strategy to have a chance of working, he needs to build or buy more and bigger transaction sites. For the moment, however – and it's been a long, three-year "moment" – Fairfax is focused largely inwardly and defensively on lowering costs and debt.