Christopher Niesche: Overbidding in an internet auction or ahead of the game?

Christopher Niesche

Paying $700 million for a website is an eye-popping amount. But is it too much?

Certainly some comparisons suggest Fairfax paid a king's ransom for Trade Me.

The price is almost double Fairfax's annualised advertising revenue in New Zealand of about $435 million. And it's more than half the $1.2 billion Fairfax paid for INL's stable of 80 newspapers and magazines in 2003.

Fairfax chief executive David Kirk - just six months into the job - has bet about 17 per cent of the Australian newspaper company's market capitalisation on the New Zealand online advertising industry.

What Fairfax has, in essence, bought is the name "Trade Me"; it's paid for the perception among most New Zealanders that if they want to buy or sell something online then Trade Me is the place to go.

It's a business with a low cost of entry - just a website, in fact. But emulating such a business and challenging its rule is no easy task.

This is a lesson Fairfax learned in Australia, where it has had only modest success in developing its own digital business and lags the market. Paying $700 million may not look like too much to Fairfax if it can secure market dominance in one fell swoop.

Indeed, compare what Fairfax is paying with prices on other similar businesses and it doesn't look quite so bad. The newspaper publisher has paid 15.6 times Trade Me's forecast earnings for 2007, compared with the listed Australian job website seek.com.au, which is trading at a slightly more expensive multiple of nearly 17 times earnings.

This is especially true when taking into account Trade Me's hugely dominant position.

In the end, of course, it all comes down to how much earnings growth Trade Me can continue to deliver.

Its growth up to now has been spectacular, but from a low base, and maintaining that momentum won't be easy, especially with more media companies competing for online advertising revenue.

Declining classified advertising revenue is undoubtedly an area that newspapers worldwide - including APN National Publishing, the publisher of the Herald - need to address.

Whether paying a fortune for a website is the right approach is another matter.