Most of the talk around the Fairfax share raid has centred around a board seat. But Gina Rinehart’s more likely course of action would be to march into chairman Roger Corbett’s office with a deal to swap her Fairfax shares for The Sydney Morning Herald, The Age and The Australian Financial Review.
That’s right; a share cancellation for three newspapers and their digital operations. The price and the outcome of such a deal might come down to how Fairfax’s institutional shareholders view the value of the major mastheads in driving internet traffic to transactional businesses such as RSVP and Domain.
Any row over a board seat would merely be negotiating leverage for mining magnate Rinehart. Her prize is the two metro mastheads and the monopoly financial daily whose value, these days, is more strategic than financial.
Australia’s richest woman has raided Fairfax for its clout, not for its investment potential. It is unlikely that Corbett and his board colleagues would gladly shuffle aside to let Rinehart into the boardroom. They know she craves influence. They know she could be a nuisance as a cashed-up gadfly agitating for representation as a director. There are no hard and fast rules for how and when a shareholder gets a seat on a company board.
Neither does Rinehart have much clout, at this point, in the institutional community that controls the Fairfax share register. But it is these institutions that will make the decision on the fate of Fairfax and its media publications should a deal of substance be put.
Ten years ago, about the time of the Sydney Olympics, The Sydney Morning Herald made about $100 million.
The brutal hit to its advertising market share – and consequently its profitability – from the internet has dried up the “rivers of gold” as its classified advertising was once nicknamed.
Even though the Herald and The Age command dominant positions in their online operations – such as this site, BusinessDay – the growth in digital ad revenues has not been able to compensate for the loss of traditional newspaper revenues.
Hence a Fairfax share, which once proudly traded above $5, in the 80-cent range. It is Fairfax’s once glamorous newspaper assets that have been hit hardest while the sharemarket now rates Fairfax’s New Zealand online auction house Trade Me as the jewel in the crown.
While the major titles struggle for profitability, the regional newspapers, vended into Fairfax Media by John B. Fairfax via the Rural Press merger a few years ago, have been making about $200 million a year at the earnings before interest tax depreciation and amortisation (EBITDA) level.
Sharemarket analysts ascribe a valuation to the regionals of roughly six-seven times EBITDA. Accounting for the value of Trade Me, which is being spun out in a sharemarket float, investors leave little value in Fairfax shares for its major metro mastheads and the AFR. Although the company’s market value in toto is about $1.8 billion, there is $1.5 billion debt.
On the latest figures available, Rinehart owns roughly 10 per cent of Fairfax. She already had 5 per cent and, although she had been aiming for another 10 per cent last night, appears to have picked up only another 5 per cent of the stock. She would need to mop up some more stock before consolidating a strong position to bargain with the board.
The institutions would want their pound of flesh before parting with such household names as the Herald and Age. And the political and community furore over any sale to Rinehart would be their leverage.
The other factor is the value put on the major mastheads in driving traffic to the transactional businesses. Due to segmental accounting/reporting changes, it is difficult to get a fix on the numbers here but it is fair to say that there is more long-term value in the huge online traffic numbers of Fairfax Media than is being recognised by the market – so heavily out of favour and “short-sold” are Fairfax Media shares.
Apart from the economics of any deal to swap her shares for the mastheads, Rinehart would encounter significant community opposition to buying Fairfax newspapers and digital operations.
The newspaper market in this country is split roughly 70-30 between Rupert Murdoch’s newspapers on the one hand and Fairfax and WA News on the other.
The Murdoch press is already favourably disposed to the Minerals Council view of the world while Rinehart’s politics are said to be strenuously ideological in the fashion of her late father Lang Hancock. Rinehart control of the Fairfax mastheads could have a dramatic influence on politics in this country.
Any tussle, then, for the venerable Fairfax mastheads would entail not just economic considerations, but community and political issues too. These issues would play into the hands of the institutional shareholders who would no doubt demand recompense for parting with the major mastheads and the effect this could have on the attendant Fairfax transactional businesses, which feed off the enormous online traffic.
Apart from matters of price, then, there would be much focus on the likely direction of Fairfax editorial. And some ideas from Lang Hancock in his book, Wake Up Australia, provide some hints, such as how “we can change the situation so as to limit the power of government”.
“It could be broken by obtaining control of the media and then educating the public,” he wrote.
There were several ideas on how to gain control of the press. One was for Australian retailers to refuse “to give advertisements to any paper which did not support a change in the constitution to reduce government to an absolute minimum”.
“Control of the press could also be obtained by several of the big mining groups banding together with a view to taking over one or more of the present giant newspaper chains which control the TV and radio channels, and converting them to the path of ‘free enterprise’,” he said.