Why Fairfax is killing its radio stars
Fairfax Media's decision to sell its radio network is an opportunity to pay down debt and potentially acquire other digital transaction businesses that will help the company reposition its operations.
Fairfax Media's confirmation that it has put its radio network on the market represents a combination of missed opportunity and under-developed strategy. It also, however, fits with the strategic direction being pursued by new chief executive Greg Hywood.
While in the scheme of Fairfax's affairs the network of mainly talkback stations in metropolitan and rural Australia aren't of great significance, generating only about 4 per cent of its first-half earnings, they are representative of Fairfax's past strategic misadventures.
Fairfax bought the network in 2007 as part of a carve-up with Macquarie Media of Southern Cross Broadcasting, with Macquarie taking the television stations and Fairfax paying more than $500 million for the radio stations and the Southern Star video production and distribution businesses.
The stated strategy at the time was diversification (adding to the rapid shift away from reliance on its metropolitan mastheads through the acquisitions of Trade Me and Rural Press) and the acquisition of new capabilities in audio and video production that Fairfax believed would add value to its digital media platforms.
Within two years the video businesses had been sold off, and now the radio network is on the block. Fairfax missed its opportunity to integrate and leverage those acquisitions to create the truly multi-media content it envisaged, and which could have created a uniquely valuable position within an increasingly convergent and digital media environment.
While only a minor part of Fairfax, the radio stations (the flagship stations are 3AW and 2UE, but the network includes four capital city talk stations, three music stations and eight regional stations) represent a useful lump of value that, because Fairfax failed to integrate them with its online platforms or take advantage of the cross-promotional potential of its newspapers' content and talent, can be readily realised.
John Singleton's Macquarie Radio Network, which owns Sydney's 2GB, has already been identified as the most obvious buyer of the capital city talk stations, although it might be more interested in one or two of them rather than the entire network. Fairfax may encourage bidders for both the whole network and its individual component stations to try to maximise the proceeds, which analysts estimate at around $250 million.
Radio isn't much of a growth sector but it has proved very resilient and generates stable cash flows and attractive margins, which might appeal to financial players as well as trade buyers.
Fairfax plans to use the proceeds, assuming the sale is successful in producing an attractive price, initially to pay down its $1.3 billion or so of debt.
Given the recent profit warning – earnings before interest, tax, depreciation and amortisation are expected to be around $600 million against the $639 million generated last financial year – and the general downturn in advertising being experienced by all media, reducing Fairfax's leverage is a prudent objective.
Only yesterday Seven West Media lopped $20 million from its guidance for this year, while News Corp referred to material declines in advertising revenues in its local publishing businesses when announcing its third-quarter earnings slump earlier this month.
Having nearly choked on its debt levels during the financial crisis, Fairfax will be particularly risk-averse. Hywood's response to the revenue and earnings decline has been to embark on a cost-slashing exercise to extract $15 million of annual savings by controversially shedding most of the metropolitan newspapers' sub-editors. Only a small proportion of those savings will be re-invested in the mastheads.
The other reason for cashing out the network is Hywood's plan to try to save the metro mastheads by using their content to attract audiences for Fairfax's digital transactions businesses. For that strategy to have a chance of succeeding Fairfax will need to develop, or more likely acquire, more digital transaction businesses.
Even if the purchases are modest in size, Hywood will need something of a war chest. In the near term, putting the radio network up for sale will provide some insurance against another deep advertising recession.
Beyond that he no doubt hopes to trade a non-core standalone asset for businesses that can be bolted onto Fairfax's digital platforms, and that fit with his new core strategy for transitioning the group and its venerable mastheads fully into the digital age.
While in the scheme of Fairfax's affairs the network of mainly talkback stations in metropolitan and rural Australia aren't of great significance, generating only about 4 per cent of its first-half earnings, they are representative of Fairfax's past strategic misadventures.
Fairfax bought the network in 2007 as part of a carve-up with Macquarie Media of Southern Cross Broadcasting, with Macquarie taking the television stations and Fairfax paying more than $500 million for the radio stations and the Southern Star video production and distribution businesses.
The stated strategy at the time was diversification (adding to the rapid shift away from reliance on its metropolitan mastheads through the acquisitions of Trade Me and Rural Press) and the acquisition of new capabilities in audio and video production that Fairfax believed would add value to its digital media platforms.
Within two years the video businesses had been sold off, and now the radio network is on the block. Fairfax missed its opportunity to integrate and leverage those acquisitions to create the truly multi-media content it envisaged, and which could have created a uniquely valuable position within an increasingly convergent and digital media environment.
While only a minor part of Fairfax, the radio stations (the flagship stations are 3AW and 2UE, but the network includes four capital city talk stations, three music stations and eight regional stations) represent a useful lump of value that, because Fairfax failed to integrate them with its online platforms or take advantage of the cross-promotional potential of its newspapers' content and talent, can be readily realised.
John Singleton's Macquarie Radio Network, which owns Sydney's 2GB, has already been identified as the most obvious buyer of the capital city talk stations, although it might be more interested in one or two of them rather than the entire network. Fairfax may encourage bidders for both the whole network and its individual component stations to try to maximise the proceeds, which analysts estimate at around $250 million.
Radio isn't much of a growth sector but it has proved very resilient and generates stable cash flows and attractive margins, which might appeal to financial players as well as trade buyers.
Fairfax plans to use the proceeds, assuming the sale is successful in producing an attractive price, initially to pay down its $1.3 billion or so of debt.
Given the recent profit warning – earnings before interest, tax, depreciation and amortisation are expected to be around $600 million against the $639 million generated last financial year – and the general downturn in advertising being experienced by all media, reducing Fairfax's leverage is a prudent objective.
Only yesterday Seven West Media lopped $20 million from its guidance for this year, while News Corp referred to material declines in advertising revenues in its local publishing businesses when announcing its third-quarter earnings slump earlier this month.
Having nearly choked on its debt levels during the financial crisis, Fairfax will be particularly risk-averse. Hywood's response to the revenue and earnings decline has been to embark on a cost-slashing exercise to extract $15 million of annual savings by controversially shedding most of the metropolitan newspapers' sub-editors. Only a small proportion of those savings will be re-invested in the mastheads.
The other reason for cashing out the network is Hywood's plan to try to save the metro mastheads by using their content to attract audiences for Fairfax's digital transactions businesses. For that strategy to have a chance of succeeding Fairfax will need to develop, or more likely acquire, more digital transaction businesses.
Even if the purchases are modest in size, Hywood will need something of a war chest. In the near term, putting the radio network up for sale will provide some insurance against another deep advertising recession.
Beyond that he no doubt hopes to trade a non-core standalone asset for businesses that can be bolted onto Fairfax's digital platforms, and that fit with his new core strategy for transitioning the group and its venerable mastheads fully into the digital age.
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