Fairfax Media property site the main prize as TPG ups its offer
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.
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$2.61bn (€2.37bn).
In theory, that's still a discount to what Fairfax could be worth. Fairfax's net income is roughly in line with that of Tronc, owner of the 'Chicago Tribune' and 'LA Times'. 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. Now value the Domain property website at a 20pc discount to its main competitor REA Group. You can then extract a price of around A$1.30 a share.
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. Gannett, a better-run rival to Tronc in the US, gets a 6.31 enterprise value-to-ebitda multiple; News Corp trades on 7. Domain, meanwhile, is taking market share from REA. Morgan Stanley has argued that would entitle it to a premium, rather than a discount.
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 - six in fact. Western private equity shops like TPG aren't in the habit of overpaying for assets, and a sale at A$1.30 would represent a 29pc premium to the A$1.01 volume-weighted average price of the stock over the three months before last Monday's preliminary offer. If the 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 plans to cut about 115 jobs. There aren't many routes to profitability for print news these days, and the few that appear to be succeeding have a global reach that Fairfax will never be able to match.
The interests of labour and capital have ever been opposed. If a richer TPG offer is a boon to shareholders, journalists and their readers are likely to suffer in proportion. Every extra cent TPG spends is a cent it has to make back. Cost-cutting has already been severe enough that the 'Sydney Morning Herald' published a typo in its front-page headline this month. TPG has invested in traditional media before, but property Domain is the clear prize, a nice complement to TPG's stake in Singapore's PropertyGuru Group. A more likely fate for the print titles would be combination with broadcaster Nine. It 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 economy for print publishing. (Bloomberg)