06/08/2015 - 15:06

Could media turn back to the future?

06/08/2015 - 15:06

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To merge or to demerge is a question that goes beyond the mining industry; it’s one that is also dividing opinions in the media world, with Australian and American publishers heading in opposite directions in what looks like a classic schism of ideas.

Could media follow the example of the South32 demerger?

To merge or to demerge is a question that goes beyond the mining industry; it’s one that is also dividing opinions in the media world, with Australian and American publishers heading in opposite directions in what looks like a classic schism of ideas.

BHP Billiton’s split to create the new Perth-based business, South32, is the big Australian resources demerger that has divided opinions about whether it created or destroyed value.

In Australian media, the trend has been in the opposite direction, with newspaper, television and radio companies forging ever-closer relationships in the belief that size equals safety and an ability to offer advertisers a one-stop shop when it comes to buying time on air and space in print.

Something totally different is happening in the US, with two of that country’s biggest media groups splitting into separate newspaper and television businesses, returning to a status that existed decades ago.

Who’s right and who’s wrong in the worlds of mining and media is one of the more interesting questions in business today.

BHP Billiton obviously believes less is more, because it enables management to focus on fewer, bigger business units, and not get distracted by second-tier operations. Other miners, including Rio Tinto, do not agree, yet; they want to see whether the split works as promised.

The US media splits include the creation of two companies totally focused on newspapers, a business most investors have consigned to a category titled ‘no growth’ thanks to the invasion of the internet into their traditional markets.

Gannett and Tribune Publishing are two of the oldest names in US media. Gannett publishes newspapers in 92 markets with titles that range from USA Today to The Alamogordo Daily News in New Mexico. Tribune’s titles include the Los Angeles Times and the Chicago Tribune.

During the past three decades, both big media groups have tried to be all things to all people, with traditional newspapers sharing time, floor space and management time with television, radio and the internet.

It didn’t work, or at least that’s the view of the directors of Gannett and Tribune, because over the past 12 months they have carved their businesses into pure newspaper and pure electronic, a split that can be easily compared with BHP Billiton focused on bulk commodities and South32 mainly in smaller volume base metals.

Gannett made the most recent move, splitting in two just six weeks ago and earning, much to the surprise of seasoned media watchers, the praise of at least one big investment bank, Credit Suisse.

What caught the eye of the bankers was a positive response from investors to the return of pure-play, stock exchange-listed newspaper companies.

“We see this as a positive in a sector where investors generally assume the worst,” Credit Suisse said.

While the share prices of the newspaper operations of both Gannett and Tribune have been relatively weak, trading at a ratio of around four-times EBITDA (earnings before interest, tax, depreciation and amortisation), their success suggests “there is some investor appetite for cash generative pure-play publishing stocks, albeit at low valuations”, according to Credit Suisse.

America doesn’t always get it right, and Australian companies do not have to follow trends emerging over there.

But if the new-found interest in standalone newspaper publishing is successful, thanks to the industry having (a) survived the internet revolution, and (b) found a new base that serves dedicated newspaper readers and advertisers, then Australian publishers might have to reconsider their urge to merge.

Credit Suisse used the Gannett and Tribune examples to apply the financial multiples of the new newspaper-only businesses to Australian media; and it arrived at some surprisingly positive conclusions, including Sydney-based publisher, Fairfax Media, having a 12-month target share price of $1.20 compared with recent sales at 85 cents, and News Corporation having a target price of $22.42 versus a recent price of $19.28.

Locally, the media-split theory emerging in the US raises an interesting question for the dominant local newspaper and television business, Seven West Media, which has been following the full integration model that Gannett and Tribune have just dumped.

Whether a trip back to the future for the Channel Seven network and WA Newspapers makes sense, or is even possible given the degree of integration, is unknown.

But as a guide to interest investors, it is possible to use the Credit Suisse four-times EBITDA valuation mechanism to put a current value on the newspaper operations of Seven West.

In the 2014 financial year, the newspaper division of Seven West had an EBIT (a number before deducting depreciation and amortisation) of $65.9 million, which implies a value for the business (essentially the old WA Newspapers) of $263.6 million.

At the halfway mark in the 2015 financial year, the newspaper division’s EBIT was $28.4 million, implying full-year earnings for the term that ended on June 30 of $56.8 million, or a business value of $227.2 million (but perhaps lower as the pre-Christmas half-year is generally the stronger period for publishers).

Whatever the value of Seven West’s newspaper business, or that of Fairfax and News, the point remains that a new media theory has been unleashed in the US and, if it works, Australian media will be keen to follow.

Back to the future? Perhaps.

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