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Strong demand as Fairfax sells Trade Me

ROBERT KIDD, FIONA ROTHERHAM AND WILLIAM MACE
Last updated 19:30 17/12/2012

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Fairfax has completed the sale of its 51 per cent share of Trade Me.

Trade Me chairman David Kirk said shares had been placed with a broad range of institutions and that demand had been strong.

Fairfax Media's share price rose 3 per cent in trading today on the ASX after chief executive Greg Hywood reaffirmed the company's commitment to digital media following the sell down of the stake in Trade Me.

Hywood said the deal will deliver A$616m ($768m) and will further strengthen Fairfax's balance sheet as some of the funds will be used to pay down bank debt.

The AFR later reported that management had confirmed Fairfax would deconsolidate Trade Me's balance sheet which carried NZ$166m in debt. 

That mean its likely Fairfax's net debt would fall to as low as A$100m as it also had a further US$80m from the recent sale of Fairfax's US agricultural publications.

''Following the sale, Fairfax Media will have one of the strongest balance sheets in the media sector,'' Hywood told staff. 

He said Fairfax will look for new acquisitions in the digital space, but they were likely to be small scale. 

''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.'' 

Kirk said the sell down of Fairfax's controlling stake was a ''good thing'' for the New Zealand online company.

''It's difficult for me to comment on Fairfax's strategy or approach but I can see their reasons for doing it, that's understandable. Furthermore it provides us with a much larger free float, more liquidity in the stock and some new high quality stakeholders which is good for us."

'When asked if he thought Trade Me was now vulnerable to takeover given it will no longer have a cornerstone shareholder, Kirk said any company is vulnerable and the most vulnerable time was when a 51 per cent stakeholder was wanting to sell down.

He said the key for existing shareholders was for Trade Me to manage and run the business as well as it could so it was fairly priced in the market.

He rejected suggestions Fairfax could become a competitor to Trade Me in New Zealand where it was so dominant, but wouldn't rule out Trade Me expanding into Australia. 

''We obviously have a long term plan for the growth of Trade Me. The most promising opportunity for the business is continuing in the e-commerce space in New Zealand and in the New Zealand classified businesses there are lots of opportunities for growth. 

We have looked at geographic diversification and Australia is clearly one of those markets we would look at but it's certainly not a priority.''

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Trade Me CEO Jon Macdonald said that at an operational level it was “business as usual for Trade Me” and that the sell-down would have no material impact on revenue or costs.

Hywood resigned from Trade Me's board to concentrate on his Fairfax duties.

Gail Hambly and Sam Morgan, the other Fairfax nominated directors, offered to resign but the existing independent directors asked them to remain on the board.

Shares in Trade Me are expected to resume trading tomorrow.

WHERE TO NOW FOR FAIRFAX?

Fairfax Media's sale of the remaining 51 per cent of stock in Trade Me has sparked speculation over more potential changes at New Zealand's biggest media companies.

Options could include a New Zealand sharemarket float if Fairfax decides to detach its New Zealand operations from those in Australia. 

New Zealand media, including the Dominion Post, The Press, the Sunday Star-Times and Stuff.co.nz, contributed 13.2 per cent of Fairfax's overall earnings in the year to June 2012 while Australian metropolitan and regional media contributed 59 per cent.

Trade Me contributed almost A$82 million - a fifth of Fairfax's overall earnings in 2012 - and avoided the goodwill impairments which saw more than A$3 billion wiped off the value of the company.

The stated intention of the Trade Me sale is to help Fairfax put itself on even financial footing by paying down debt, from about A$914 million at last balance date to potentially around A$100m depending on how much is retained for investing in new online companies.

Fairfax and other trans-Tasman media companies such as APN News & Media have been anxious to cut costs and pay off debt as advertising revenues have dried up as their funders patience has dwindled.

Lower consumer confidence and spending has dented advertising revenue for media companies globally and a traditional main source of income for newspapers - classified advertising - has moved online.

APN has been running a strategic review of its New Zealand businesses, including the New Zealand Herald, for most of the year and has indicated it will sell the Christchurch Star, the Oamaru Mail and Wellington's Capital Community Newspaper group.

If the market trends continue and the boards of both Fairfax and APN decide to further unencumber their companies of costs, debts and logistical difficulties, a public listing may be the way forward, said Forsyth Barr managing director Neil Paviour-Smith.

''You'd sell it as a mature, high-yielding type operation,'' said Paviour-Smith.''The New Zealand assets of Fairfax have actually traded reasonably well, it's in Australia you've still got high legacy cost structures, probably typical of a lot of the Australian industry that haven't made changes of the scale that's happened in New Zealand over the years.

''Milford Asset Management principal Brian Gaynor said the time to do that was now well past with few buyers interested in print businesses. But Forsyth Barr's head of research Rob Mercer has predicted high demand for the likes of the New Zealand Herald given a realistic price.''

Because of the maturity and the risks, it would have to be quite an attractive price and well-supported by a conservatively structured balance sheet and a solid yield.

''Paviour-Smith agreed a listing was an option but said the Herald could also be a target for a private buyer.''

It may be that the Herald is of interest to a private equity type outfit that likes the cashflow, brand, market position and so on.

It could probably be refloated in its own right, almost back to [the Herald's former listed holding company] Wilson & Horton style,'' he said.

Sydney-based Fat Prophets media market analyst Greg Fraser said sharebrokers would be keen to talk-up a sharemarket float, but the underlying problems facing media companies could not be solved with new ownership or capital structures.

''You have to think about why they're selling assets - it's just about paying down debt or getting rid of businesses that aren't paying their way,'' said Fraser.

''It signals the distress that these companies are experiencing... in the short term they've got no choice, but until they can sell some of these assets they're going to have to continue to cut costs.''

* Fairfax Media owns Stuff.co.nz

- Stuff

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