Dangers in media merry-go-round

The proposed relaxation of media ownership restrictions is neither historic nor significant, research company Morningstar says. There was a similar reform back in 2006 that culminated in average value destruction of more than 50% of those involved. Business editor Dene Mackenzie reports.

Research company Morningstar sees no happy ending to any potential frenzy in the latest round of media ownership reform in Australia and questions whether Fairfax can move successfully to the new online world.

A frenzy of expensive corporate activities in 2006 culminated in average value destruction of more than 50% of those involved.

''The same could unfold this time around, in terms of the potential to overpay. Granted, we regard the reform package as overdue, given the archaic basis on which the current rules are devised.

''Digital and internet-powered alternatives are increasingly prominent.''

Elimination of the 75% audience reach and the cross-media rules might reignite another expensive mergers and acquisitions ''merry-go-round'' among media companies desperate to find ways to stabilise their earnings, Morningstar said.

Media companies were likely to eliminate any cost-savings and synergies used to justify highly priced mergers and acquisitions.

''As such, we again see no happy ending to any potential frenzy this time around, especially as the reform is unlikely to have a lasting impact on the industry's challenging fundamentals. We would look dimly upon any entity aggressively bidding for assets to extend their exposure to the structurally challenged traditional media.''

Any scale and synergy arguments to justify the ''urge-to-merge'' premium should be treated with utmost scepticism, Morningstar said.

Fairfax, which owns Stuff, The Press, The Dominion Post and other newspapers in New Zealand, operated in an industry undergoing unprecedented change, the research note said.

The traditional print-based publishing model was being completely dismantled by proliferating digital news and information outlets.

''Given 73% of its revenue is still sourced from the print publishing industry, Fairfax Media faces enormous structural headwinds as consumers migrate from newspapers to the digital arena and advertisers follow suit.''

The question then came down to whether the strength of the company's mastheads and editorial resources were sufficient for management to successfully move to the digital arena, Morningstar said.

It was on that point Morningstar lost confidence, especially on money making. The company's pricing power in the digital, multichannel environment was significantly less than under the traditional print model.

In an effort to readjust its cost base to falling revenue, the company's editorial resources were being cut.

''This could well prove costly, as editorial strength has to date been the competitive edge, along with masthead brand recognition, that has allowed Fairfax Media to maintain its strong presence in an online environment.''

Fairfax was in a strong financial position, presenting management with a flexible war chest as it grappled with the multiplatform publishing model.

The rapid growth of online property portal Domain was a prime example of how Fairfax could successfully leverage its audience in the digital environment, Morningstar said.

The biggest risk facing Fairfax was the company failing to hold on to its audience base as the company continued to migrate to the online environment.

Even if management succeeded in doing so, it was critical the cost structure was recalibrated in a timely fashion so the reduced advertising yield in the highly competitive digital environment could be offset by a step down in the expense base.

Modern consumers were reluctant to pay for content in the digital age and younger generations appeared to have a penchant for social media and short-form news.

''If these trends persist into the future, ramifications for Fairfax Media could be material.''

Another risk revolved around Domain. The recent growth of the multichannel property-classifieds business had been impressive and market expectations were increasing.

Any signs of slowing growth in the business were likely to be met with the stock being re-rated down.

The flip side of having a solid balance sheet was the risk of efforts to diversify the business mix away from print publishing failing or leading to overpaying for assets, Morningstar said.


Scary, being looked dimly on by a Research Company. Original work should not be unrestrictedly available online.