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Time to lock in Nine, Fairfax gains, says Morningstar

Lex Hall  |  18 Sep 2018Text size  Decrease  Increase  |  
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The mooted merger between Nine and Fairfax is a sound move but Prem Icon shareholders may be wise to realise their gains now because the competition from global online rivals is only going to intensify, says Morningstar.

The cross-media deal, which is in essence a takeover by Nine (ASX: NEC), will create a combined media entity that will command 14 per cent of the Australian advertising expenditure pie, says Morningstar analyst Brian Han.

nine fairfax merger article

The Nine-Fairfax tie-up will command 14 per cent of the local advertising expenditure pie

Han values the combined Nine-Fairfax entity at $1.99 share on a discounted cash flow basis, with the potential for $62 million cost synergies.

However, Han warns that scale alone may not be enough to ward off "digital insurgents" such as Google, Facebook, Youtube and Netflix, whose share of the market is now more than 50 per cent - up from 30 per cent five years ago.

"Size and scale are unlikely to furnish the combined group with an economic and spare it from the structural headwinds wreaking havoc on traditional media, which will account for 70 per cent of the entity's aggregate earnings," Han says.

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"As such we believe the current exuberance regarding the merger and its potential synergies provides an opportunity for shareholders to crystallise the recent gains in both companies’ shares."

Under the deal, which was announced in late July, Nine shareholders will own 51.1 per cent of the combined entity while Fairfax (ASX: FXJ) shareholders will own the balance. The designated chairman and CEO will both be from the Nine camp.

"The structural headwinds buffeting the traditional media industry (including free-to-air TV and newspapers) are persistent," Han says.

"We believe these challenges are the very reason Nine and Fairfax are seeking to merge, in a bid to bulk up, maintain relevance with audience/marketers, and be in a better position to amortise rising content costs over a wider audience base, as well as extract synergies from combining the two companies’ diverse operations."

Morningstar's fair value estimate for Nine is $1.70, 24 per cent below the current stock price.

Fairfax, the 177-year-old publishing house which owns venerable mastheads such as The Australian Financial Review and The Sydney Morning Herald, and The Age in Melbourne, is trading at 82 cents, above its FVE of 75 cents.

Han sees no regulatory hurdles to the deal following the relaxing of media ownership rules in October last year, which scrapped the "two-out-three rule" and the "75 audience reach" rule.

While Han applauds the deal he says it is worth remembering that previous tie-ups in the wake of media reform ended badly.

"We've seen this movie play out before," he says. "Perhaps we are still traumatised by our experience of the mid 2000s, when a flurry of deals ended with a combined value destruction of over 50 per cent."

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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 senior editor for Morningstar Australia

© 2021 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 'regulated financial advice' under New Zealand law has 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. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. 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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