Morningstar | Corporate Action - We Recommend Fairfax Shareholders Vote in Favour of Scheme to Merge with Nine
We recommend Fairfax Media shareholders approve the proposal for Nine Entertainment to acquire all their shares, at a scheme meeting to be held on Nov. 19, 2018. This follows the approval of the deal by the competition regulator on Nov. 8, 2018--a decision we had expected.Shares in no-moat-rated Fairfax have retraced substantially in recent weeks, with initial market exuberance over the Nine merger since trumped by concerns over its (and especially 59.4%-owned Domain's) and Nine's near-term earnings momentum. The stock is now trading to 12% below our AUD 0.71 fair value estimate for Fairfax in its current form.
If Fairfax successfully merges with Nine, we calculate the benefits of the combination to result in the enlarged Nine entity being worth AUD 1.99 per share (see our report "Nine and Fairfax Muscle Up to Enter the House of Pain: Urge to merge has strategic merits, but structural headwinds are here to stay," published Sept. 17, 2018). This would lift the implied Fairfax intrinsic value to AUD 0.75 per share, based on the agreed merger ratios of 0.3627 Nine shares plus AUD 0.025 cash per Fairfax share. That would be 20% above the current Fairfax stock price.
Critically, we see a more secure future for Fairfax as part of a larger entity with Nine. Amid intensifying competition from digital insurgents such as Google, Facebook, and Netflix, Nine-Fairfax will be better-positioned to compete, boasting an extensive multimedia platform (albeit still primarily rooted in traditional media) that will reach more than half of Australians each day through television, online, print, and radio. This should provide advertisers with a broader platform to reach audiences across the spectrum. Further, the vast personnel and editorial resources of Nine-Fairfax, backed by a strong balance sheet (pro forma net debt/EBITDA of 0.6) will facilitate greater investments in content and digital capability--both crucial to ensuring the merged group's long-term future.
Fairfax Media is engaged in the publishing of news, information and entertainment, advertising sales in print and digital formats, and radio broadcasting. Co.'s segments include: Domain Group, which is engaged in real estate media and services business; Metropolitan Media, which is engaged in metropolitan news, sport, lifestyle and business media; Australian Community Media, which is engaged in newspaper publishing and online for all Australian regional, community and agricultural media; New Zealand Media, which is engaged in newspaper, magazine and general publishing and online for all New Zealand media; and Radio, which is engaged in metropolitan radio networks in Australia.
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