Domain sale would reshape the future of Nine with $1.4bn windfall

Nine Entertainment appears certain to sell its stake in real estate business Domain after receiving an improved bid from US suitor CoStar.

Any deal to offload Domain would increase speculation about the further break-up of media company Nine Entertainment. Picture: AAP

Media company Nine Entertainment looks almost certain to offload real estate business Domain – in which it holds a 60 per cent stake – after it welcomed an improved bid from US suitor CoStar on Thursday.

Declaring its revised offer of $4.43 a share its “best and final price” in the absence of any other interested party, the US company has now been granted access to Domain’s books to carry out due diligence on the state of the property listings platform’s finances.

At that price, the Domain deal would be worth $2.79bn, and Nine would receive about $1.4bn after tax if the proposal was accepted.

Negotiations on an improved bid for the Nine Entertainment-owned real estate business have been underway since CoStar’s initial $4.20 per share takeover proposal on February 21, when the US property giant acquired a 16.9 per cent stake in Domain.

Last week, The Australian Financial Review – which is owned by Nine – claimed that Nine’s bankers had told CoStar that they would be willing to accept $4.65 a share for the media company’s 60 per cent stake in Domain.

CoStar founder and president Andy Florance.

On Thursday, the rhetoric coming out of Nine in response to CoStar’s improved bid of $4.43 was telling, and strongly suggested that the company was satisfied with the sweetened price which falls roughly halfway between the US company’s initial investment of $4.20 and Nine’s ambit claim of $4.65.

“Nine notes that, as the controlling shareholder of Domain and with a focus on the best interests of Nine shareholders, it is supportive of Domain’s decision to grant due diligence access to CoStar at the increased offer price of $4.43 per Domain share, plus up to $0.04 per share of additional value by way of franking credits,” Nine’s statement to the ASX read.

The offer of $4.43 represents a 5.5 per cent increase on CoStar’s initial $4.20-a-share bid and adds a 42 per cent premium to Domain’s closing price on 20 February. But market conditions have changed since CoStar’s initial offer, with the S&P/ASX 200 falling 5 per cent over the past 5 weeks amid the ongoing worldwide political trade climate.

Shares in Nine-controlled Domain fell 22 cents to $4.25 (down 4.9 per cent) on Thursday.

However, a factor in favour of CoStar is the fact that the Australian dollar is currently valued at just over US63¢, which is roughly 10 per cent below its 10-year trading average.

In a note to clients on Thursday, Barrenjoey analysts said an option for co-investment was not on the table.

“The DHG (Domain Holdings Australia) release states CoStar is seeking to acquire 100 per cent of DHG shares. This suggests that NEC will not retain a minority stake in DHG (and we remind investors CoStar has shown a preference for 100 per cent ownership in its other transactions).”

Should the sale proceed, it would not only deliver a windfall to Domain’s shareholders but would dramatically alter the make-up of Nine Entertainment.

Any deal to offload Domain would increase speculation about the further break-up of the media company, which in addition to a controlling stake in Domain, currently owns a free-to-air television network, streaming service Stan, publishing assets including The Age, The Sydney Morning Herald and the AFR, and various radio assets.

It’s widely expected that Nine will seek to sell its radio arm within the next 12 months, and it is also facing a steep task to arrest the slide of its free-to-air television business, which is in structural decline.

In a note to clients, JPMorgan analysts said the “use of funds will be critical in shaping (Nine Entertainment’s) longer-term outlook/strategy”. “A $1.4bn (return) would leave ample room for paying down debt and some form of capital return – albeit alternative avenues of digital growth would increase in importance in the event of a full sale.”

Earlier this month, it was reported that Nine Entertainment’s largest institutional shareholder, fund manager Pendal – which owns 7.6 per cent of the media company – was in favour of selling Domain to CoStar.

Nine’s largest shareholder, billionaire Bruce Gordon, who has effective ownership of 25 per cent, has not publicly revealed his views on the proposed transaction.