Fairfax dropping Trade Me to pay off debt

The decision to sell its remaining 51% stake in New Zealand online auction site Trade Me was a sad indictment on the state of Australian publisher Fairfax Media, Craigs Investment Partners broker Chris Timms said yesterday.

Shares in Trade Me have been halted to let a bookbuild take place for the sale of Fairfax's shares, Trade Me said, without disclosing a price. Broker reports have put the sale price at $A3.05 ($NZ3.81) a share, a 5.3% discount to the $A3.22 closing price on the ASX. The dual-listed shares closed at $NZ4.05 in New Zealand on Friday.

The sale is seen as a move to pay down Fairfax's mounting debt as it overhauls its business away from printing presses and into the digital world, and is part of a shift away from indebtedness after Rupert Murdoch said the publishing arm of his media empire would be debt-free after the News Corp demerger.

''They think the sale had more to offer by making them debt-free than future opportunities and the substantial cash flows Trade Me offers,'' Mr Timms said.

Craigs expected there to be strong demand for the balance of the shares. Institutions would look to add to their existing holdings.

While some brokers had rated the sale of Trade Me as generating the same sort of interest as the recent float of Fonterra units, Mr Timms said the two sales could not be more different. Trade Me was a dominant player in a small market and Fonterra was a global company.

The sale would be positive for Trade Me, as the removal of Fairfax as a cornerstone shareholder would take away any uncertainty about the auction site's future.

However, Mr Timms questioned the decision for the sale when Fairfax had maintained it was moving to increase its online presence.

''Reducing debt could be the only way Fairfax could do that,'' he said.

Trade Me stock is rated an average ''hold'' based on eight analyst recommendations compiled by Reuters, with a median target price of $4.10.

At that price, Fairfax would reap about $A616 million from the sale, or $NZ768.3 million in New Zealand-dollar terms at yesterday's cross-rate of A80.18c per NZ dollar.

Forsyth Barr broker Tom Bliss said Trade Me performed well since listing, delivering better-than-forecast earnings.

''We believe Trade Me has a positive medium-term outlook and could deliver solid growth across its various divisions.''

Trade Me was leveraging growth through three key areas, he said. They were:

• New sales - Trade Me had partnered with Channel Advisors and was expanding relationships with other participants such as Hallenstein Glassons, The Warehouse and new international partners.

• Mobile auction trading - increasing use of trading via smart devices, expanding trading opportunities.

• Pay Now - Trade Me's secured payment system which had moved into profitability and had substantial upside if the company could replicate eBay's PayPal success.

Forsyth Barr had a 12-month target price on Trade Me of $4.10. The current hold recommendation was based on Trade Me's share price previously being above $4, Mr Bliss said.

The latest tranche of Fairfax's exit will mean the media group will have pulled out about $1.5 billion since last year's partial float and subsequent sell-down and also through saddling Trade Me with $166 million debt. That does not include the $220 million dividend Fairfax extracted in 2011 to cancel related party debt owed to the auction site.

Trade Me has been considered the jewel in Fairfax's crown, growing revenue and underlying earnings since the media group bought it under former CEO David Kirk in 2006 for about $700 million.

The Australian media group, whose papers include the Dominion Post, Press and Sunday Star Times, wrote down the value of goodwill and mastheads by $A2.8 billion in the past financial year, on top of the $A1 billion charge it has taken since 2010.

Shares in Fairfax fell 5.6% to A51c on Friday, and have plunged 29% this year. The stock is rated an average ''hold'' based on recommendations compiled by Reuters, with a median target price of A44c.

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