Takeover!
Shares in Fairfax Media (ASX:FXJ) sprung further into life last week, hitting a nine year high, after the announcement of one of the biggest media deals ever seen in Australia. Nine Entertainment is effectively buying Fairfax for $2.16 billion. The shares have been running in recent weeks, with the ‘smart money’ clearly aware that something big was brewing.
The deal is a positive outcome for shareholders in Fairfax, but also in our view for investors in Domain Holdings Australia. We have reverted to a Hold on Fairfax Media, but have upgraded our rating on Domain to a Buy for Members without exposure.
The Deal
The $4.1 billion deal represents the biggest shakeup of the media landscape in the country’s history. While dressed up as a merger, the market made clear who it saw as the winners. Fairfax Media rose as much as 15% before finishing the session up 8% last Thursday, before drifting on Friday, and edging up again today. Nine shares have lost around 10% since the deal was announced on Thursday.
Turning to the charts, and the takeover has added to an already strengthening technical picture for Fairfax Media (ASX:FXJ). On the daily chart, prices have pushed further above dynamic support at the 200-day (green line) and 50 day (red line) moving averages. In-turn, an upward rotation in share price above prior resistance sighted between $0.77 and $0.81 has also transpired. This is made up of the 50% and 61.8% Fibonacci retracement levels respectively. A brief move above the 78.6% Fibonacci retracement at $0.86 highlights the strength of recent momentum.
On the monthly chart, resistance was respected at the 61.8% Fibonacci retracement of $0.92 as represented by the red set of retracements in November 2017, and this is likely to remain formidable near-term. This led to a short-term correction to evolve, which now appears to have terminated. Significant structural support has formed at the 38.2% Fibonacci retracement around $0.67.
Under a Scheme of Implementation Agreement, Fairfax (ASX:FXJ) shareholders will receive 0.3627 Nine shares and $0.025 in cash for each Fairfax share. Nine shareholders will own 51.1% of the combined entity, while Fairfax shareholders would own the remaining 48.9%.
The offer translates to around $0.94 per Fairfax share, representing a premium of 22.1% to Fairfax’s closing price last Wednesday. The deal is subject to approvals from shareholders and regulators.
Fairfax chairman NickFalloon said the deal “represents compelling value for Fairfax shareholders.” The release stated that “The directors of Fairfax will unanimously recommend that Fairfax shareholders vote in favour of the scheme in the absence of a superior proposal.”
We have highlighted the inherent value in Fairfax, and suggested on several occasions that this might be unlocked one day through M&A activity. That day has arrived. Nine has recognised the growth potential in Fairfax’s digital assets, and in particular at Domain and Stan.
Source: Fairfax Investor Presentation
Media reform has cleared the way for a much needed shakeup of the media landscape, and as traditional players look to combat disruption. The deal will create scale and annual cost savings of at least $50 million within two years. This comes on top of recent cost savings initiatives announced by Fairfax, including the sharing of print facilities with News Limited. Nine’s CEO Hugh Marks will lead the combined company, which will be renamed Nine.
We see the deal as a good outcome for Fairfax (ASX:FXJ) shareholders. We believe it is also likely to secure the necessary regulatory approvals. Whilst perhaps a remote prospect, a superior proposal emerging from elsewhere can also never be ruled out.
Shares in Domain also rallied and having a majority shareholder with even more scale is a clear positive for the company. Management at Nine have made clear that Domain was key driver of the deal, and they will also get to work extracting cost and revenue synergies. We expect non-core assets will be put on the block, including Fairfax’s regional media assets (News Corp has been mooted as a buyer) and business units across the Tasman.
Domain Group for its part also has a very competent CEO stepping into the breach. As covered in our last review, Jason Pellegrino, the Managing Director of Google in Australia and New Zealand, is set to begin in his new role as CEO of Domain effective 27 August 2018.
Turning to the chart of Domain, the takeover of Fairfax has seen prices push firmly up from the early 2018 lows. Prices have retaken dynamic support at the 50-day moving average around $3.19, in addition to that provided by the 61.8% Fibonacci retracement at $3.24, which is a positive development. A move back above prior support provided by the upward sloping green dotted line would further strengthen the technical outlook.
Ultimately, recent legislative reform has cleared the way for a much-needed shakeup of the media landscape, and this deal is very much a ‘sign of the times’ as traditional players look to combat digital disruption. It really is a case of ‘kill or be killed’ and this is also why we expect the deal will secure the necessary regulatory approvals.
Prime Minister Malcolm Turnbull has cast his vote saying, “To be frank, I welcome the announcement…. I think it will strengthen both of them as television and online and print journalism…bringing them together enables two strong Australian brands with great, very long traditions to be able to be more secure. So, on that basis, I welcome it.”
The deal has also thoroughly vindicated the decision to demerge Domain last year, making Fairfax a more digestible target, but also highlighting the value of Domain in its own right.
Source: Domain Presentation
With Fairfax (ASX:FXJ) trading on around 14 times FY19 earnings, but some way from the effective ‘merger’ offer, we recommend Member continue to hold their shares. Domain shares have been re-rated to 37 times FY20 earnings (dropping to 25 times by FY22), but we believe that the digital growth prospects, and the prospective backing of a majority shareholder with even more scale, more than justify this rating. We recommend Domain Holdings Australia as a buy to Members without exposure.
Disclosure: Fairfax Media and Domain Holdings Australia (ASX:FXJ) are held in the Fat Prophets Global Contrarian Fund (ASX: FPC). Both companies are also held in the Fat Prophets ConcentratedAustralian and Small/Mid-cap managed account portfolios.
