Domain a diamond in the rough for Nine, but what’s it worth?

Nine Entertainment’s board is facing its most crucial choice since the merger with Fairfax seven years ago – whether to accept a $2.7 billion offer for its property marketplace portal, Domain, or let things stand.

It is a future-defining decision for the nation’s oldest and largest media empire.

There are some saying the sale of Domain could open the doors to either a break-up of Nine or potentially a bid for it from its Bermuda-domiciled and Wollongong-based largest shareholder – billionaire Bruce Gordon.

So no pressure!

If an interested party ponies up the right money, then Domain (as they say in auction room parlance) is “on the market”.Credit: Peter Rae

In some respects, it should be a simple choice for Nine’s chair Catherine West, who is less than a year into the job, and interim chief executive, Matt Stanton, who have just announced the company’s earnings have fallen 25 per cent in the latest half year.

If the current interested party, CoStar, or perhaps another suitor ponies up the right money, then Domain (as they say in auction room parlance) is “on the market”.

Nine, the publisher of this masthead, isn’t a company that can afford to pass up billions of dollars, even if it means selling one of the family jewels. Its television assets, in particular, remain challenged as Nine continues to grapple with the ongoing decline in the number of people watching linear TV.

Nine’s mandarins can make all the noise in the world about the importance of Domain to Nine media’s ecosystem and long-term growth strategy, but everything has a price, and Nine’s shareholders will put enormous pressure on its board to accept an offer for Domain, provided it is rich enough.

Domain, in which Nine has a 60 per cent stake, is a tasty corporate morsel. It is the diamond in the rough of Nine’s stable of media assets.

Nine chair Catherine West.Credit: Dion Georgopoulos

Other than streaming service Stan, Domain is the only business inside Nine that is not structurally challenged. But unlike Stan, it is not faced with myriad competitors such as Netflix, Paramount or Disney, with more to come.

Rather, Domain is a duopoly – a digital real estate business that operates in a rich Western country whose population is obsessed with residential property and has one of the highest levels of home ownership in the world.

Its competitor, REA, has the leading market share and, not coincidentally, is the jewel in the crown of Rupert Murdoch’s News Corp.

Domain’s market share is a fraction of REA’s, whose margins are roughly double that of its rival. This difference is reflected in the values of the two companies. REA is valued at $31 billion while Domain is worth $2.7 billion.

(REA is valued using a far higher multiple of earnings. And if that multiple was applied to Domain, its value would be well ahead of CoStar’s current offer of $4.20 per cent and closer to $5.70).

Technical as this sounds, it just means that Nine’s management has to be looking for a better price than the offer CoStar has tabled for Domain.

The positive spin on selling Domain (the second-best house in a street with only two houses) is that there is the opportunity for a new owner to renovate – which means there is an upside for any buyer who reckons it can run the company better and pinch market share from REA.

Domain may not be firing on all cylinders, but it still posted a 14 per cent jump in revenue for the half-year to December and improved its “for sale” listings for the period by 7 per cent.

Within its stable of Nine siblings, Domain was one of the star performers. Nine television’s earnings fell by 35 per cent, publishing fell 4 per cent (but did enjoy a healthy growth in subscriptions). While the radio business put in a good performance, its overall contribution to profit was only $5.7 million. Stan performed well by leveraging the Olympics coverage to add more subscribers and grow its revenue per customer to deliver a 16 per cent lift in profit.

To be fair, Nine’s traditional media businesses have been hit by a cyclical downturn in advertising, and have had to tackle a long-term structural decline that began decades ago as people stopped buying newspapers and watching linear television.

During the old Fairfax days, it dabbled in digital companies such as Stayz and online shopping site Trade Me to help fund the disrupted newspaper business. It has taken more than a decade, but most international publishers – including Nine’s publishing arm, which owns The Sydney Morning Herald, The Age, and The Australian Financial Review – have stabilised earnings from their old mastheads by moving to a subscription-based model while taking out costs.

The sale of Domain would deprive Nine of one of its growth businesses, but the return would also leave it debt-free, give it a financial buffer to deal with the ups and downs of its traditional businesses, and still have plenty left over to reward shareholders with a tasty capital return.

So again – no pressure!

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