A Fairer Deal for Fairfax, No Fortune for Newspapers

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(Bloomberg Gadfly) -- That's more like it.

Seven days after a cheeky 95 Australian cents-per-share opening bid, TPG Capital has returned with a more realistic offer for Australia's Fairfax Media Ltd.

The new proposal would drop the initial attempt to leave existing shareholders with most of Fairfax's weak assets and all of the debt, and instead give A$1.20 per share for the whole shebang, for a market value of about A$2.61 billion ($1.93 billion).

In theory, that's still a discount to what Fairfax could be worth. Assign the newspaper assets (including the Australian Financial Review , the Sydney Morning Herald and Melbourne's Age, as well as a host of smaller local papers in Australia and New Zealand) the 4.77 enterprise-value-to-Ebitda multiple of Tronc Inc. Now value the Domain real-estate website at a 20 percent discount to its main competitor REA Group Ltd. You can then extract a price in the region of A$1.30.

That doesn't seem an overly generous comparison. Fairfax's revenue is not significantly less than Tronc's, and its net income is substantially higher. The structure of declining daily newspapers in a few big cities (Chicago, Los Angeles, Sydney, Melbourne) plus a range of smaller local publications is strikingly similar. At least Fairfax isn't stuck with a stupid name and a ridiculous digital mission statement. Gannett Co., a better-run rival to Tronc in the U.S., gets a 6.31 enterprise value-to-Ebitda multiple; News Corp. trades on 7. 

Domain, meanwhile, is taking market share away from REA. Morgan Stanley has argued that would entitle it to a premium, rather than a discount, relative to REA.

Still, theories don't pay Fairfax shareholders' bills, and it's been a long time since they've seen numbers like A$1.20 attached to their stock -- about six years, in fact. Western private equity shops like TPG aren't in the habit of overpaying for the assets they seek to acquire, and a sale at A$1.30 would represent a 29 percent premium to the A$1.01 volume-weighted average price of the stock over the three months before last Monday's preliminary offer. If Fairfax's board can extract that price, shareholders should jump at the opportunity.

That's cold comfort for Fairfax's 6,000-odd employees, many of whom were on strike last week over management plans to cut about 115 jobs at big-city masthead titles. There aren't many routes to profitability for print news these days, and the few that appear to be succeeding -- New York Times Co. and Daily Mail & General Trust Plc are the only obvious cases among listed companies -- have a global reach that Fairfax will never be able to match.

The interests of labor and capital have ever been opposed, so just as a richer TPG offer is likely to represent a boon to shareholders, journalists and their readers are likely to suffer in proportion. Every extra cent TPG spends persuading Fairfax investors to sign up to a takeover will be a cent it has to make back in its subsequent handling of the business, and the cost-cutting has already been severe enough that the Sydney Morning Herald published a typo in its front-page lead headline this month:

Helen Vatsikopoulos @Hellonvee
Sydney morning herald - how do u spell economy? https://t.co/3EYaJM0xAf
Twitter: Helen Vatsikopoulos on Twitter

TPG has invested in traditional media from time to time, but Domain is the clear prize here -- a nice complement to TPG's stake in PropertyGuru Group, the Singapore-based real estate portal that's the biggest player in Southeast Asia. A more likely fate for the print titles would be the long-rumored combination with Nine Entertainment Co., a broadcaster and the heir of a previous disastrous private equity foray into Australian media.

Nine could do with a larger audience share to address declining revenues, but it doesn't have a lot of money for takeovers. Its earnings are pretty much in line with Fairfax's print titles, but even combining those two streams would cause net debt to rise close to 2.9 times Ebitda, assuming TPG held onto half of Fairfax's debt and the titles went for Tronc's 4.77 times multiple.

Those levels are manageable, just, but uncomfortable for a media company in 2017. It's a brutal ecomomy for print publishing.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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