Suitors walk, Fairfax to wilt

TWO lots of Wall St mainchancers can’t make the Fairfax Media group “work” for them at $1.20 a share and certainly not at the $1.30 directors wanted, writes Terry McCrann.

Fairfax Media chief Greg Hywood. Picture: Aaron Francis

TWO lots of Wall St mainchancers can’t make the Fairfax Media group “work” for them at $1.20 a share and certainly not at the $1.30 directors wanted.

This is obviously “bad news” for Fairfax shareholders — the shares dropped straight below $1 — but oddly, not necessarily, narrowly, that bad.

The really bad news came more in the detail of why they couldn’t make it work; because it suggests that more conventional (industry) owner-operators can’t make it work either. Not at these price levels and not into the longer-term.

The “not-so bad” bad news turns on the fact these sorts of mainchancers have high, ahem, “benchmarks”. That’s to say, they are extra-greedy.

They precisely target “challenged businesses” like Fairfax, with uncertain futures and more uncertain values; and they absolutely intend to make huge profits in re-selling them back to general investors.

What happens after that resale is entirely of no interest to them; especially whether the “quality” and “value” of the business they’ve resold “lasts” only as long as the equivalent of a used car warranty period.

Look at TPG’s last big buy-and-resell deal down under: Myer.

So on one level, all they are saying, to coin a phrase, is that they can’t see enough upside in Fairfax’s future; they won’t be giving this piece of down under media a chance.

But, there could still be upside. These mainchancers would want to see a realistic prospect of earning at the absolute minimum at least 15 per cent per year on their equity outlay; and preferably at least 20 per cent a year over the typical five years from buy to resale.

That’s, to stress, on the money they outlay; they are looking to at least double it and indeed preferably generate an aggregate profit of 150 per cent-plus, with a great deal of help from the leverage of low-interest debt.

It’s important to understand why they couldn’t see it working and what the Fairfax “alternative” — the Plan A — means.

Essentially Fairfax is two businesses: its Domain real estate advertising and its scattered print-based media and radio. Clearly, importantly, Domain derives some significant leverage from its linkage to the two main mastheads.

In working out overall value going forward you have to calculate it as Domain growing and the rest shrinking. And further, how much it would cost to close the print and whether such closure would undermine or at least crimp the Domain value growth.

The mainchancers clearly concluded that only wouldn’t the numbers work at $1.20, on their profit requirements; there was way too much risk in that future. And that’s Fairfax’s real problem.

This is because all that risk and uncertainty remains with the company’s “Plan A” alternative — to partially float off Domain, keeping 70 per cent and so continued consolidation of its profit; and also, critically, the linkages.

So we will just see more of what we saw in yesterday’s trading update from the company: Domain revenue up 10 per cent, with digital revenue up 22 per cent.

So non-digital Domain revenue — that’s to say, print — was shrinking; along with all the rest. Metro media down 12 per cent, other print down 11 per cent, radio down 5 per cent and NZ down 4 per cent.

That’s at best a company value going sideways; in truth, actually irresistibly shrinking. And that’s assuming Domain continues to bloom in its competitive space, and that Melbourne-Sydney property continues to boom.

That’s a lot of hope to build a $2.5 billion value on.

SURPRISE? SCHMURPRISE

WILL the Reserve Bank spring a “July surprise” with its official interest rate decision today?

Short answer: no.

Longer answer: take a look at the Aussie dollar and what the banks have been doing with their housing loan rates and especially the rates for property investors as well as interest-only loans.

The banks have already delivered the equivalent of about one official rate rise across all home loans and make that closer to two for investors and on interest only.

Does the RBA want to signal a second and third effective set of hikes, which would also all-but promise a third and a fourth, as it rarely embarks on solitary rate changes?

The Aussie around US76c is not uncomfortable but the RBA certainly doesn’t want to see it head back to US80c.

If anything it would still prefer it to be in the low-70s.

Slightly longer answer: also, look at the latest inflation data, commodity prices and jobs. None of them individually, far less collectively demand the RBA start signalling rate hikes.

Add it all up and the RBA is still waiting to see the US Fed deliver on its promised rate hikes, while being happy to see the banks unilaterally lift their home loan rates.

That’s, happy, both macroeconomically and macroprudentially.

DRY RUN ON WASTE

THE state Labor government is not bailing out the Heyfield timber mill, its workers and indeed the town.

The government set out deliberately to destroy the mill’s business by starving it of logs. Now it’s had second thoughts — anyone sense an election heading its way? — and will throw away taxpayer money to buy the mill and keep it half open (and still starved of logs).

This is just the dry run for the bigger disaster coming our way — with electricity.

Again, first the government will force coal-fired power stations to close and then will have to spend hundreds of millions of your dollars to keep the lights on.

Originally published as Suitors walk, Fairfax to wilt