Crunch time for Nine Entertainment as US giant CoStar flags $2.65bn bid for Domain

US giant CoStar has timed its Domain takeover pitch to perfection as Nine’s great media experiment is starting to crumble just five years after its merger with Fairfax.

More than five years on Nine is seeing pressure to unwind parts of its Fairfax merger. Picture: AAP

It’s crunch time for Nine to figure out what sort of media company it wants to be and will come under intense shareholder pressure to finally set free Domain, its woefully underperforming property listings business.

The great experiment of mashing together free-to-air television, streaming, digital publishing, legacy radio and a property listings business onto the one stretched balance sheet could be starting to crumble just five years after Nine took control of Fairfax Media.

The cashflow rich, but low-growth, publishing operations are simply not enough to sustain Nine’s other businesses like television which is now facing real structural pressures. There’s also a need to fund the capital-hungry streaming arm Stan. Domain too has been starved of the capital to grow in order to prop up Nine’s other operations while keep paying dividends.

There’s opportunity, layered on opportunity in CoStar’s $2.7bn play for Domain, with the cashed-up US listings operator lobbing its audacious bid while the Australian property player is strategically drifting; its shares are depressed, and is looking for a full-time chief executive.

It comes at the same time Domain’s 60 per cent owner-Nine – which will call the shots in any takeover – has its own vacancy in the CEO office while chair Catherine West is facing a rearguard push inside the boardroom from cornerstone shareholder Bruce Gordon.

The WIN owner Gordon is now cashed up and free of regulatory constraints through the recent sale of his Northern Rivers television station to consolidate his control and therefore influence on Nine.

Gordon has effective ownership of up to 25 per cent in Nine held directly as well through an equity swap arrangement that he is set to clean up. At the same time there’s the likes of activist investor John Wylie circling for his own piece of Nine’s break-up action.

WIN Corporation’s Bruce Gordon at Channel Nine studio in Adelaide.

Nine needs to sort out its own management race before it can get down to business on deciding Domain’s future, although investors will want things to move quicker.

Initially, Nine’s former chief financial officer and now acting Nine chief Matt Stanton looked to take charge of the given he was backed by investors for taking control of the broadcaster’s cultural issues in the television arm, while also vowing to cut costs through a major strategic review.

However, there’s suggestions Stanton, in the acting role since September, could be cooling with Gordon said to be keen to have his WIN chief Andrew Lancaster as CEO, although this has been discounted by some close to Gordon.

Nine will deliver its first half profit on February 25, which should be the time for the Nine board to sign off on the new chief.

Meanwhile, back at Domain former chief Jason Pellegrino had flagged his intention to exit last October, but was pushed aside last week by chairman Nick Falloon, the one time lieutenant of Kerry Packer.

Falloon put former REA boss Greg Ellis into the acting Domain CEO role while a search is underway for a full-time boss.

With so many managers flanked by their acting title, CoStar has timed its pitch perfectly.

Domain on Friday said it was considering the $4.20 a share approach but urged shareholders to take no action. In a statement, Nine said it had started a review of the offer which comes with a 36 per cent premium, but suggested it was prepared to hold out.

“Domain is of strategic importance to Nine’s media ecosystem and our long-term growth strategy,” the Nine statement said.

Through its late night raid, CoStar snapped up a 7.5 per cent from Fidelity, further buying saw it take that stake to nearly 17 per cent. This makes the property player the second biggest investor in Domain.

It should be noted Fidelity has a reputation of being one of the more patient investors in the market, signalling even it can’t see a medium term fix for Domain.

It should also be noted this masthead is owned by News Corp which competes against Nine in some markets. News Corp is a 61 per cent shareholder of REA, a direct competitor of Domain.

Nine Entertainment chair Catherine West at the company's annual general meeting last year.

The fact remains that Domain has delivered woeful returns for investors, including Nine, unable to capitalise on the post-Covid property boom and holding underweight positions outside Sydney and Melbourne. There are real questions over whether it is too late to make up for lost time, particularly as the property market is slowing while official cash rates look set to stay high for longer.

Even if CoStar were to take charge, it would take deep pockets just to move Domain forward.

With a live bid on its table Nine is now expected to face intense pressure from all of its shareholders to enter talks with the aim of relinquishing its grip on Domain and cash out – but for a higher price.

Even at CoStar’s non-binding offer of $4.20 a share, this still represents a $1.6bn cash return that Nine’s investors would demand be sent back to them, although some would need to be set aside to pay down the media company’s uncomfortably high debt pile.

All through its ownership, Nine has shown it is incapable of adding value to Domain.

Take any point in the past five years, and Domain has underperformed both REA as well as the broader sharemarket. CoStar has put a value of less than $3bn on Domain. REA is valued by the market at more than $30bn.

Using the start of Covid pandemic as a baseline when markets and property really started to rally, Domain’s total return since then which includes dividends is negative 2 per cent, where the benchmark S&P/ASX 200 index has returned 49 per cent.

So Domain and therefore Nine shareholders have seen their investment capital go backwards – even after dividends were paid.

Over the same period, REA delivered a return of 152 per cent and, importantly, used its Aussie cashflows to expand into new offshore markets, pushing into the US and trying to make a monster play for the UK (It’s $12bn bid for London-based Rightmove last year fell on the UK’s tough takeover rules).

Through this time Domain has barely managed to grow interstate. Instead Domain has remained welded to its Sydney base where property prices, liked its prospects, are now starting to cool.

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Originally published as Crunch time for Nine Entertainment as US giant CoStar flags $2.65bn bid for Domain