Ironies at play as private equity giants chase Fairfax

Most journalists don’t understand the business of media and most media execs don’t understand the business of content.

Most journalists don’t understand the business of media and most media executives don’t understand the business of content. Business consultants understand neither.

This is at the heart of long standing problems at Fairfax Media, in the middle of a redundancy round for 125 journalists and under offer from two US private equity players with plenty of media experience. Anyone who has seen the way consultants perform up close and personal knows they are trained monkeys with one trick: strip out costs.

Why boards pay tens of millions of dollars for this sort of standard MBA approach is beyond me. Shareholders should ask a lot more questions about the issue, starting with why are we paying our chief executive so much if he or she needs to be told how to cut costs by people who don’t even understand which costs to cut without damaging the business, as the various redundancy rounds at Fairfax most certainly have done.

Who would have guessed that if you sack journalists and advertising sales staff you get a temporary lift in margins? Well actually even the cleaner knows that.

Those who have seen it a few times and understand the complex, organic relationships between content, readers, advertising volumes, ad rates and newspaper subscriptions and cover prices know this is a downhill spiral.

Look at the former Fairfax broadsheets: now tabloids they are as thin as suburban free papers most days and often in broadsheet equivalent terms half the number of pages of The Australian, which sells for only an extra 20 cents. It is a tribute to their past glories that anyone is prepared to pay $2.80 to buy a copy of The Sydney Morning Herald and The Age, especially when the local News Corp rivals offer twice as much content for half the price.

Of course in the face of massive digital disruption, cost cuts need to be made. I cut about 120 journalists in my 13 years running this paper. But media leaders need to be very careful with such cuts not to let their most important and powerful journalists go. They are the reason people buy the paper.

Anyone who has not read former Fairfax CEO Fred Hilmer’s book and is interested in the subject should get a copy. Hilmer, a smart guy who ran the Australian Graduate School of Management, thought about his papers in terms of “content modules”. He had no sense for comparing the worth of David Marr’s modules with those of a cadet court reporter.

The consultants have been called in at Fairfax many times since, often by present CEO Greg Hywood, to give cover for disposing of expensive providers of content modules. When Hywood told the Senate last week that the ABC was eating Fairfax’s lunch it was a very old line used in this paper about Fairfax for over a decade.

What Hywood did not say was that Fairfax has been busily paying the best part of half a billion dollars to its best journalists to leave and set up shop at its rivals, such as the ABC, The Guardian, the Huffington Post, The New Daily and even News Corp. The Guardian, a big competitor in the progressive news space Fairfax occupies, now employs Marr, editor Lenore Taylor, political editor Katharine Murphy and picture editor Mike Bowers. Same right across the media landscape, where Fairfax’s best journalists are prospering and building its competitors.

Now another former Fairfax journalist Mike Seccombe tells us in The Saturday Paper how shocking it is that some of the Fairfax board, and certainly its two suitors, see the newspapers as no more than promotions vehicles for the company’s profitable and desirable Domain property listing site, No 2 in the market behind News Corp’s realestate.com.au, operated by REA Group, which is majority owned by News Corp.

I love journalism and have given it 43 of my 60 years. But guess what? The readers always loved the classified ads sections.

At the peak of its Saturday print circulation, the SMH in the early noughties was selling 410,000 copies, The Age over 360,000, and their sales started plummeting when the homes, cars and jobs classifieds began migrating online. Not only did the classified “rivers of gold” fund the journalism, they strongly underpinned newspaper sales, however much editors liked to think circulation growth was built on their brilliant front pages and story ideas.

Well, as if to remind journos of the role of classifieds, it now looks like journalist and former editor Hywood, probably responsible for more journalist sackings than any other Australian media executive, could be replaced by a real estate classified ads boss - either Domain’s hugely successful Antony Calatano or former REA boss and now Hellmann and Friedman private equity adviser Greg Ellis, who runs German property website group Scout24.

If you are wondering why Fairfax only last year was publicly signalling the end of Monday to Friday print newspapers and is now the subject of an auction between San Francisco and New York based Hellman and Texas private equity group TPG you are seeing things the way I do, and cetainly the way Catalano does. Like Hellman, TPG understands the media business and runs US classifieds firm RentPath and Singapore-based PropertyGuru.

Hywood backflipped on print closure only a couple of months ago and it is now clear TPG sees value in print for its real estate focussed investment proposal. Hellman may feel the same way. Certainly Catalano knows what many advertisers don’t seem to understand. Newspapers remain very good vehices for brand building and sales.

Same with traditional free to air television. Why else do we think we see so many Compare The Market, Trivago, Expedia, Webjet, Carsales and REA ads on prime time television? The disruptor know for sure that traditional media works for brands.

Catalano, a friend of Melbourne-based TPG Australian boss Joel Thickins, last week was publicly revealed to have negotiated privately before the offer was made, giving the impression he was going behind the back of his board. Privately though Hywood is likely to have been on the same page.

Hywood and Catalano’s sons are joint owners of property website Apartment Developments and Catalano worked under Hywood when he was CEO of Tourism Victoria before joining the list of Hilmer departures.

Thickins gave Senate testimony on Friday in Melbourne pledging TPG will respect the editorial independence of the Fairfax papers. Hellman is likely to be forced to do the same, even if it auctions some of the papers.

All this is delicious irony for observers of long-ailing Fairfax. Catalano was undermined by Hilmer in his first big real estate deal in September 2003, when he had just succeeded in negotiating with senior Melbourne real estate companies to come back to the Fairfax fold from Eric Beecher’s Melbourne Weekly in a planned equity publishing arrangement between Fairfax and the realtors.

He was told the next day that Hilmer had agreed to make a $67 million offer for former SMH editor Eric Beecher’s Text Media to secure the same advertisers who had been stitched up by Catalano the previous night for free.

Later Catalano, eventually given a large redundancy from his classified ad manager role at the Age, was also to be enriched by Fairfax management incompetence. He had clashed with then Melbourne Fairfax head Don Churchill who was interested in cuts while Catalano wanted to go for growth. As always at Fairfax cuts won.

Catalano, a long time believer in equity deals with real estate advertisers, went out and started his own version of Beecher’s Melbourne Weekly, by then owned by Fairfax. Catalano set up Metro Media Publishing and its real eatate glossy, The Weekly Review, only to be bought out in two stages by his former boss Hywood for cash, scrip and the roll in of Fairfax’s community papers. All up Catalano probably made $140 million on the deals between 2011 and 2015. He was then placed in control of Domain for Fairfax and is the company’s biggest individual shareholder.

Now he is in a good position to take management control of the whole company with TPG, leaving Hywood to cash out his options for a tidy $10 million and drive his Maserati into the sunset.

There are more coincidences inside the Hellman bid. Chairman emeritus Brian Powers is a former Fairfax CEO who clashed with then Kerry Packer adviser Malcolm Turnbull during the Tourang bid for Fairfax in 1991. Suffice to say both Powers and Turnbull made plenty of money out of Fairfax.

Also advising on the Tourang bid at that time was Mark Carnegie, who is back in the bid team today with Hellman. Powers and present Fairfax chair Nick Falloon also worked together for the Packers, Powers running Consolidated Press and Falloon PBL.

So while it might be deflating to journalists who don’t understand the economics of the business they are in, I reckon Fairax is better placed with either bidder than with the string of retailers who have dominated its board for years. And Falloon, a relatively new chair, has done a good job setting up a virtual auction in the interests of shareholders.