The article below was posted in the AFR yesterday.
'Starting gun' has fired on Australian media M&A
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Nine Entertainment Co CEO Hugh Marks was nowhere to be seen when private equity was running the numbers on Fairfax Media last year. But a lot has changed inside 12-months. Chris Hopkins
Analysts reckon the surprising thing about Nine Entertainment Co's bid for Fairfax Media was that it took so long.
"Starting gun on long awaited M&A in Aussie media," UBS's sales desk told clients on Thursday morning, capturing the mood among fund managers when
Nine finally pounced with a scrip heavy bid for Fairfax Media.
When media ownership laws finally changed last October, it was expected to be a matter of when traditional media companies pursued tie ups, rather than if.
Cost savings would be tempting enough for boards and chief executives whether or not mergers could create "genuine reinvention opportunities", as Morgan Stanley's media analysts put it recently.
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The changing habits of Australian media consumers, according to Morgan Stanley analysts.
Sources said Nine approached Fairfax with the proposal "weeks ago", and Fairfax granted due diligence.
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The due diligence program was said to be shorter than the usual five-to-six weeks bidders request under such circumstances, and was carried out in Sydney on a confidential basis.
Of course Fairfax is quite familiar with ushering a bidder through a due diligence process.
Early last year, it took private equity firms TPG Capital and Hellman & Friedman through a data room, made management presentations and the like,
before both walked away without making a binding bid.
Interestingly, Nine wasn't part of that process, even though it was seen as the most logical trade buyer. And a motivated trade buyer can almost always trump a private equity bid because of the available synergies (which Nine now says will be worth $50 million a year).
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Metro TV and radio advertising spend grew faster than digital in the six months to June 30, according to UBS.
What's changed for Nine?
But back then, media ownership laws were yet to change. Three rules were abolished by parliament in October; the "reach rule" which prevented a TV broadcaster from having direct reach to more than 75 per cent of the country; the "two-from-three" rule which prevented an owner from controlling newspapers, TV and radio in one market; and removal of TV and radio licence fees.
And importantly, Nine itself was not out of the doldrums. It had been beaten in television ratings by rival Seven for the past decade and while momentum was turning, there were still fears about its long-term future.
But all that has changed recently. Nine shares are up 89 per cent in the past 12-months and 64 per cent since the beginning of this year, which means it has much more fire power now than it did this time last year.
Fund managers say the share price run has been caused by two things; Nine's competitive position against Seven and to a lesser extent Ten, and the wider advertising market.
For the first time in a decade, advertising spend has recently shifted away from digital advertising back towards traditional mediums television and radio.
Metro TV advertising revenue grew 5.8 per cent in the six months to June 30, according to data from research house SMI, while metropolitan radio was up 6 per cent and regional radio 14.8 per cent.
Digital mediums were 4.5 per cent in the same time frame.
So the pendulum has swung firmly back in Nine's favour. And patience from Nine chairman Peter Costello and CEO Hugh Marks, advised by Jefferies' Michael Stock and law firm Ashurst, looks like it will be rewarded.
The other question is what, if anything, happens with Nine's great rival Seven West Media. And other traditional media companies.
As UBS told clients: "Question for other media assets is whether expectations of more M&A drive sector rally….or whether some miss the boat?"
Which makes fund managers, analysts and bankers all thinking this is unlikely to be the last traditional media deal we see this year.
