What next for Fairfax after Trade Me?
That's the question now being pondered after confirmation today by Fairfax Media of the A$616 million ($768m) sale of its controlling 51 per cent stake in Kiwi auction site Trade Me.
Shares in Trade Me are in a trading halt while investment bank UBS finalises the sell down of the 202 million shares for A$3.05 with institutions in Australia and New Zealand - a more than 5 per cent discount to the last market price. The sale is expected to be completed later this week and will end Fairfax's ownership of Trade Me.
Without being specific, Fairfax CEO Greg Hywood has said some of the sale proceeds will go towards reducing Fairfax's debt, about A$914m at last balance date to a more respectable A$230 million or so.
Hywood said Fairfax, publisher of stuff.co.nz, will be left with a strong balance sheet and financial flexibility to invest as it completes the company's transformation from a debt-laden traditional print business into one focused on the new media world.
The final sell down of Fairfax's stake in Trade Me has been welcomed by its biggest shareholders, including billionaire Gina Rinehart who holds a 14.99 per cent stake. She's been lobbying hard with the Fairfax board to sell assets and sees value in Fairfax freeing itself of that oppressive debt burden.
The flip side of course is that Fairfax, in relieving itself of those high debt interest payments, is actually losing more from the income Trade Me provided.
Fairfax's group revenue and earnings before interest, tax, depreciation and amortisation (ebitda) will reduce as the company has previously consolidated Trade Me's financials, given its majority ownership. Without Trade Me, Fairfax's group ebitda of A$506m in the last financial year would have been almost one-fifth lower. The AFR reported debt costs should fall in the order of about A$40m a year without Trade Me.
Industry sources here had expected the sell-down six months down the track but Hywood obviously wanted lower debt while the advertising market is still in the doldrums and well before he has to next front up to the banks to refinance some of that debt.
It's ironic that the sale of former Fairfax CEO David Kirk's far-sighted purchase back in 2006, which gave it inroads into the digital world, now paves the way for Fairfax to do more in that space.
Trade Me was, after all, its biggest digital asset.
Hywood said the involvement in Trade Me over the past six years has helped the company grow its digital experience and expertise in developing creative and successful digital businesses.
"As we look to the future, we'll be focused on continuing the growth of our digital assets. They are central to Fairfax's strategy," he said.
What will concern shareholders is just what those new assets are and the return expected off them.
The AFR has reported Fairfax is close to signing former senior Microsoft executive in Australia, Daniel Petrie and Alison Deans, the former head of eBay Australia and New Zealand, to advise on new digital opportunities once the sale goes through.
Fairfax is said to be in the final stages of negotiating a partnership agreement with netus, a technology investment company run by Petrie and Deans. The AFR said the netus business model involves lower risk than is normal with technology venture capital companies by looking for a proven business model or something it can license in Australia.
Fairfax has also seconded Erik Knight for six months as a consultant on its digital strategy.
The 29-year-old Rhodes Scholar, reporting directly to Hywood, has a degree in economics geography and is author of the book Reframe: How to solve the world's trickiest problems.
Making money out of media surely rates up there as one of the trickiest, with media companies worldwide searching for sustainable business models. It's a work in progress but what is clear is that the Fairfax of the Future will need to be a vastly different company from when Kirk pushed it further into the digital landscape through the Trade Me purchase.
Fairfax will and should look for opportunities that make money to help in the expensive transition of its legacy print assets to new digital models that include user-pays.
One thing we can be sure of, the public must adjust to paying for the news they get over the internet sooner rather than later. There is both a cost to producing it, and a value in having it.
Disclosure of interest: Fairfax Media is the owner of this website and Fiona Rotherham is a very minor shareholder in Trade Me.