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Tick for media merger spurs boost in Nine's fair value

Lex Hall  |  19 Nov 2018Text size  Decrease  Increase  |  
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Morningstar has increased its fair value estimate for the Nine Entertainment Company by 18 per cent, saying it expects the company's merger with Fairfax Media to yield synergies of up to $62 million.

Morningstar analyst Brian Han increased his fair value estimate to $2 this morning after Fairfax shareholders voted overwhelmingly in favour of the 175-year-old company's merger with Nine Entertainment, slapping down a late bid by former Domain chief Antony Catalano to save Fairfax.

At 3pm Sydney time, shares in Nine (ASX: NEC) were up 1.84 per cent, trading at $1.66. Fairfax (ASX: FXJ) was up 1.95 per cent at 63 cents. Its fair value estimate is 71 cents.

nine fairfax merger media news FVE

The tie-up could reach half of all Australians each day through TV, online, print and radio

In his note to announce the increase in fair value, Han said last year's relaxation of media ownership laws would help the Nine-Fairfax entity stay relevant.

The combination of Nine's TV offerings and Fairfax's newspapers - which include The Sydney Morning Herald, The Age and the Australian Financial Review - would create a "cross-media behemoth" that could better compete with digital giants such as Google, Facebook, YouTube and Netflix, Han said.

"The increase in the still no-moat-rated Nine's fair value estimate primarily stems from our $62 million synergy expectation from combining with Fairfax, with the most obvious sources being corporate expenses and non-content-related areas, such as back office, promotional/advertising, communication, technology and professional fees," Han said.

But this could be conservative, Han adds, given the potential $50 million savings the group could make by merging newsroom resources.

In the past two months leading up to today's announcement, Nine's stock price has fallen almost 30 per cent, falling below Morningstar’s previous market-low FVE of $1.70 for Nine as a stand-alone entity.

However, the "ferocity" of the market's about-face now presented upside, Han said.

And while size and scale of the new group are no grounds for a sustainable competitive advantage, Han argues the risks are more than reflected in the 19 per cent discount Nine shares are trading at relative to his updated $2 estimate.

Han said the new entity had the potential to reach half of all Australians each day through TV, online, print and radio, which would in turn give advertisers greater access to audiences.

"At the current Nine stock price, what investors should now focus on is the strategic rationale for combining Nine and no-moat-rated Fairfax, following the recent relaxation of media ownership laws," he said.

"Combining the country's top-ranked TV network and the second-largest newspaper group, topped with a collection of quality digital assets in Nine Digital, subscription video on demand, operator Stan, and Fairfax's 59 per cent owned Domain, ensure the merged entity remains relevant in the eyes of audiences and advertisers."

Joining editorial and personnel resources would add to a strong balance sheet (pro forma net debt/EBITDA of just 0.6 per cent) and allow more investment in marquee content and digital capability - key to the merged group's long-term future, Han said.

And that’s not counting the key assets that excited investors when the merger was first announced on 26 July this year, which include:

  • The potential for real estate portal Domain to close the gap on rival REA Group
  • The cross-promotional opportunity for Nine’s national TV properties in raising Domain's awareness beyond NSW and Victoria
  • The structural hedge that video on-demand service Stan provides against the longer term challenges faced by free-to-air TV

Han's update followed a meeting on Monday in which Fairfax shareholders approved the scheme of arrangement on Monday after the failure of an 11th-hour attempt by Catalano to save the Fairfax Media name.

The $4 billion merger, which has already been approved by the competition watchdog, now faces final court approval on November 27.

Fairfax Media chairman Nick Falloon said the combination is expected to complete on December 7.

Catalano, the former boss of majority Fairfax-owned real estate site Domain, had asked in a letter for Monday's shareholder meeting to be adjourned for two weeks so his late proposal could be heard.

Catalano wanted to block the merger by buying up to 19.9 per cent of Fairfax, but failed to sufficiently sweeten his offer.

"The letter contains no actual proposal that could be considered by Fairfax shareholders as an alternative to the proposed scheme of arrangement with Nine," Fairfax said in a statement to the ASX.

The merger was initially flagged in July, and the competition watchdog has already given the green light after finding it would not substantially diminish competition in Australian news and media.

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Lex Hall is content editor, Morningstar Australia

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is content editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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