Ominous portents as media stocks plunge

TO trained observers, media companies are the canaries in the coal mine when it comes to assessing the health of the economy.

TO trained observers, media companies are the canaries in the coal mine when it comes to assessing the health of the economy.

And judging by the performance of their shares in the past year, the portents are ominous.

After last week's devastating stock rout, almost all of Australia's major media stocks have more than halved since the market struck its record high in November last year.

They are being driven down by fears that the credit crisis will morph into a global recession which puts the brakes on an advertising market that is already feeling a sharp slowdown.

"To properly understand the health of media companies, you have to look beyond them to the health of their major advertisers -- the retailers, the banks, the governments and the multinationals," said Shaw Stockbroking media analyst Greg Fraser.

Most economists still expect Australia to avoid a recession but on Friday, National Australia Bank predicted growth could slow to less than 1 per cent in the coming year, with more than 300,000 jobs to be lost.

The lack of progress in the weekend G7 and G20 talks is expected to weigh heavily on the market when trading resumes this morning, with the futures market pointing to only modest gains after Friday's near-record 8.3 per cent crash.

Falls on Friday in three leading media stocks -- Consolidated Media Holdings, Fairfax Media and Macquarie Media Group -- put their cumulative share price declines since the beginning of January this year above 50 per cent. They joined Seven Network as media entities that had fallen by 50 per cent or more during the current calendar year -- and even further since the market's peak before the credit crisis hit.

Joining them with falls of 50 per cent since the peak -- and 45 per cent since January -- are APN News & Media and Austereo. News Corporation, publisher of The Australian, has fallen less than 50 per cent in the same period but has more than halved since its shares peaked in February last year.

The media share prices are reflecting growing doubts about whether advertising can be sustained, particularly following profit downgrades from Seven, Ten and Macquarie Radio and the revelations last week by Harvey Norman chairman Gerry Harvey that he may cut his total advertising budget by up to $60 million a year.

Goldman Sachs JB Were media analyst Christian Guerra said Mr Harvey's comments suggested "that a material deterioration in the advertising environment is emerging".

Shares in Fairfax -- already implementing an extensive redundancy program announced in August at its flagship newspapers, The Sydney Morning Herald and The Age -- on Friday hit a 15-year low of $2.23, down almost 9 per cent on the day.

In the same session, Macquarie Media and ConsMedia both closed at all-time lows, while APN hit a six-year low and

 
regional TV group Prime Media Group hit a five-year low. Shares in regional pay-TV operator Austar closed down 10 per cent at 99.5c on Friday -- the first time they have dipped below $1 since 2005 -- while Seven shares closed below $6 for the first time since 2004.

Six months after Lachlan Murdoch shelved his $3.3billion bid to take over ConsMedia -- which owns stakes in pay-TV operator Foxtel (25 per cent), the Fox Sports channels (50 per cent), online job ads leader Seek (27 per cent) and Nine Network owner PBL Media (25 per cent) -- the company is now valued by the market at $1.45 billion.

Eighteen months ago, APN's major shareholder, Tony O'Reilly's Independent News & Media group, joined forces with two private equity firms to make a $6.20-a-share bid for the company, valuing the company at $3billion.

Today, the company is capitalised at just $1.4billion.

Mr Fraser said the recent share price falls showed the values of these aborted takeovers had been inflated by a "feeding frenzy" following the relaxation of cross-media and foreign ownership restrictions in October 2006.

Analysts appear puzzled by the extent of the drop in Seven, now valued at less than $1.2 billion.

The company noted in an earnings downgrade last month that it had incurred losses from its strategy to "park" hundreds of millions of dollars in listed shares. The money was part of the multi-billion-dollar windfall it received from the 2006 sale of half of its TV and magazine assets to private equity firm KKR.

As part of the downgrade, the company revealed it now had cash holdings of $1.3 billion, a $448 million stake in West Australian Newspapers and $645 million in "other listed securities". This includes an unconfirmed $90 million stake in ConsMedia.

Mr Fraser said of the company's current market valuation: "Seven's cash pile alone exceeds its market valuation."