Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 265

Corporate toads kissing, but no princes here

Finally, the global wave of media mega-mergers has washed up on Australia’s shores, following Malcolm Turnbull’s removal of the ‘two out of three’ and ’75% coverage’ rules in October 2017. But will Nine’s bid for Fairfax make any difference to either organisation or will it be a case of a princess vainly kissing a toad in the hope of finding a prince? Or is it more like two toads kissing?

Media's changing landscape

Overseas, the US-based Comcast bid US$66 billion for the Fox Inc. entertainment assets which includes franchises like the X-Men and The Simpsons. That bid was pipped by Disney’s US$77 billion rival offer, leaving Fox and Comcast to fight it out for the 61% of European broadcaster Sky plc that Fox doesn’t already own.

Meanwhile rumours of further mega-mergers and acquisitions circle media companies such as CBS and Viacom by the likes of Apple and Amazon.

Closer to home, Nine Entertainment (Nine) executives appear to be equally enamored with their childhood reading of the Russian fairytale about the frog-kissing princess. They expect their corporate kiss will transform Fairfax. Nine is offering Fairfax shareholders 0.3627 Nine shares (equivalent to 82 cents currently) plus 2.5 cents cash for each Fairfax share. That’s 84 cents per share for Fairfax, or about $1.17 if the value of Domain’s in-specie distribution is included.

With 2.3 billion shares on issue, Nine’s offer values Fairfax at about $2 billion, or more than two times its book equity (which itself was written down aggressively in 2012 as a result of persistent returns on equity of less than 4%pa).

Fairfax has responded approvingly by stating:

"The structure of the proposed transaction provides an exciting opportunity for our shareholders to maintain their exposure to Fairfax's growing businesses whilst also participating in the combination benefits with Nine."

Takeovers often promise and are frequently justified on the basis of ‘combination benefits’, also known as synergies. But synergy benefits invariably fail to materialise, or if they do, they take much longer to arrive than expected, forcing the bidder to write down the goodwill in its offer. Recently, Japan Post was forced to write off $4.7 billion, several years after buying Toll Holdings with the company’s President, Masatsugu Nagato, stating: "The price we paid for Toll was high … the writedown is intended to wipe the slate clean." Wiping the slate clean is easy for CEOs when its billions of dollars of other people’s money are used as the mop.

Consumption of media has changed completely

Newspaper audiences have been gutted and diced by the emergence of digital media alternatives. The era of newspapers monetising their markets through advertising and classifieds is long gone.

Free-to-air television has likewise seen its audiences decimated not only by Facebook and Google taking eyeballs away from television, but by streaming alternatives such as Netflix, Apple TV and Amazon.

TV content has changed over the last decade. The age of binge-watching has been sparked by series such as Game of Thrones, Homeland, Ozark, Breaking Bad and House of Cards. Consumers will always be attracted to the next hit forcing media companies to keep increasing their spend on ever-higher production, casting quality and writing values.

How can Nine compete when it spends $2 billion on Fairfax, while Netflix and Time Warner (which owns HBO) and CBS (which owns Showtime) spend US$6 billion annually on developing their own content? Meanwhile, Disney and NBC Universal are spending around US$12 billion annually on TV programming.

I once likened the Australian TV competitive landscape to four card players (four networks – Nine, Ten, Seven and the ABC) locked in a room with no windows or doors. The Australian viewing audience is represented by the pile of chips that each player tries to win. Each year one of the players secures a winning hand (the most popular TV drama or reality TV concept) but the next year its mantle is lost to another network. The pile of chips never grows, it is merely passed around. Today, thanks to the likes of Facebook, Google, Amazon, Netflix and others, that card-playing room has a drain in it and chips are constantly falling down the drain making the pile of chips smaller.

Merging with Fairfax will not change that dynamic for Nine. The Fairfax audience already knows Nine exists and the Nine viewers are all familiar with Fairfax’s titles. At best, Nine will win a few chips this year or next, but lose them again the year after, or the year after that.

What motivates managers of public companies to make acquisitions?

The drivers of acquisitions include:

1. The desire to be bigger, which is the yardstick by which salaries are often measured.

2. The pressure from institutional shareholders to ‘grow’ revenues and profits.

3. The aspiration to increase the share price.

4. The need to grow faster.

5. The push from lenders and corporate advisers to take advantage of other factors such as low interest rates, a buoyant stock price or investors flush with cash and a rapidly closing window for deal-making.

6. The belief the buyer can do a better job than the target.

Rarely do the above motivations result in better long-term returns to shareholders.

Would I give my money to Nine?

There is only one compelling reason to make an acquisition and that is to receive more than is being given away. Nine's shareholders will effectively pay two times book equity for Fairfax ensuring that Fairfax’s forecast 14% return on equity will be halved in the hands of Nine's shareholders. Why would I give my money to Nine to pay more for Fairfax than I could have paid for Fairfax myself on-market?

If a princess kissing a toad does not produce a prince, then two toads kissing each other certainly won’t. The economics of newspapers and free-to-air TV are not improved by a change in ownership, and the market has already spoken. The Fairfax share price is cheering the news, while the Nine share price fell.

When viewing mergers and acquisitions, look through the lens of the industry’s economics and the return on equity of the target. When I do that, I don’t see anything to get excited about on behalf of long-term Nine shareholders or Fairfax shareholders, who may soon be Nine shareholders too.

 

Roger Montgomery is Chairman and Chief Investment Officer at Montgomery Investment Management. This article is general information and does not consider the circumstances of any individual.

 

5 Comments
James Staples
August 21, 2018

So the question is would you like to own global alphabet and facebook with billions upon billions of fcf and cash on the balance sheet or a couple domestically constrained (i dont know because i dont waste my time looking) things. Sorry you bad to waste your time reading this. Enough said.

Grumpy Geoffrey
August 02, 2018

My main worry is that the screaming commercial TV style of sensationlism, where everything is a breathless EXCLUSIVE, does not make its way into Fairfax publications as if that's the way we all want to hear our 'news' (or it it entertainment?).

Gen Y
August 03, 2018

Yes, I have similar concerns. SMH & The Age have been going further down that path in recent years, although there remains at least some journalistic integrity, especially when you compare them to most of their competition. Will Nine try to turn it into another Daily Telegraph? With Coalition putting continued pressure on ABC funding, this would play into their hands nicely.

I'd hate to think of what they'll do to AFR if they get their hands on it... surely they'll be smart enough to leave that one alone.

SMSF Trustee
August 04, 2018

The AFR is already little more than a financial tabloid. Headlines screaming about some ordinary economist's views as if they're fact rather than opinion; always seeing the negative side of things; lots of bloggers masquerading as serious journalists.

Especially the online version.

Lucy
August 21, 2018

The quality of SMH journalism has dropped significantly. It is now, with the exception of course of Adele Ferguson, Kate McLymont and a couple of good investigative journos, merely a copy of the Daily Telegraph. Substandard articles focusing on reality stars and other nonsense are now the main. And it, if possible, will only get worse.

 

Leave a Comment:

     

RELATED ARTICLES

The digital transformation of Australia’s media

banner

Most viewed in recent weeks

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

How to help people with retirement spending decisions

Super funds will soon be required to offer retirement income strategies for members in decumulation. With uncertain returns, uncertain timelines, and different goals, it's possibly “the hardest, nastiest problem in finance".

Tips when taking large withdrawals from super

You want to take a lump sum from your super, but what's the best way? Should it come from you or your spouse, or the pension or accumulation account. There is a welcome flexibility to select the best outcome.

“Trust your instinct” Hamish Douglass in conversation with Sir Frank Lowy AC

Sir Frank shares his story, including his journey from war-torn Europe, identifying opportunities, key character traits necessary for business success, and the importance of remaining paranoid yet optimistic.

Latest Updates

Investment strategies

Charlie Munger and stock picks at the Sohn Conference

The Sohn Australia Conference brings together leading fund managers to chose their highest conviction stock in a 10-minute pitch. Here are their 2021 selections with Charlie Munger's wisdom as the star feature.

Interviews

John Woods on diversification using asset allocation

All fund managers now claim to take ESG factors into account, but a multi-asset ethical fund will look quite different from a mainstream fund. Faced with low fixed income returns, alternatives have a bigger role.

SMSF strategies

Don't believe the SMSF statistics on investment allocation

The ATO's data on SMSF asset allocation is as much as 27 months out-of-date and categories such as cash and global investments are reported incorrectly. We should question the motives of some who quote the numbers.

Investment strategies

Highlights of reader tips for young investors

In this second part on the reader responses with advice to younger people, we have selected a dozen highlights, but there are so many quality contributions that a full list of comments is also attached.

Investment strategies

Four climate themes offer investors the next big thing

Climate-related companies will experience exponential growth driven by consumer demand and government action. Investors who identify the right companies will benefit from four themes which will last decades.

Investment strategies

Inflation remains transitory due to strong long-term trends

There is momentum to stop calling inflation 'transitory' but this overlooks deep-seated trends. A longer-term view will see companies like ARB, Reece, Macquarie Telecom and CSL more valuable in a decade.

Infrastructure

Infrastructure and the road to recovery

Infrastructure assets experienced varying fortunes during the pandemic, from less travel at airports to strong activity in communications. On the road to recovery, what role does infrastructure play in a portfolio?

Economy

The three prices that everyone should worry about

Among the myriad of numbers that bombard us every day, three prices matter greatly to the world economy. Recent changes in these prices help to understand the potential for a global recovery and interest rates.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.