Fairfax lower on INL bid

By SIMON HENDERY and AGENCIES

Shares in John Fairfax Holdings slumped 5 per cent yesterday, suggesting investor nervousness about the Australian publisher's $1.2 billion foray into New Zealand.

Fairfax is taking on significant new debt to fund its purchase of INL's publishing interests in a deal announced on Friday.

INL and Fairfax shares resumed trading yesterday after being halted on Friday when the companies announced they were in discussions.

INL shares closed up 70c, or 21 per cent, at $4.08 yesterday - still short of the $4.37 analysts said the deal priced INL shares at. Fairfax shares fell 15Ac to A$2.88 ($3.18).

Shares in Sky TV, INL's only remaining significant asset, dropped 5c to $4 after two days of gains on speculation that INL or parent company News Corp would mount a full takeover.

INL has said it will discuss by the end of the month what to do with its 66 per cent holding in Sky.

While Fairfax's performance on the ASX indicated negative market sentiment towards it picking up INL's publishing business - its biggest acquisition since it bought Melbourne's Age in 1983 - analyst opinion was mixed.

Salomon Smith Barney cut its recommendation on Fairfax, expressing disappointment the company had chosen to invest in mature operations.

It said while such businesses offered earnings stability, their growth potential was limited and could harm Fairfax's ability to benefit from a recovery in the Australian advertising market.

The broker also doubted the viability of a Fairfax plan to sell some INL mastheads to a third party then lease them back to claim a tax break - a mechanism already used by New Zealand Herald publisher APN News & Media.

But Merrill Lynch analyst Patrick Russel was optimistic about the acquisition, which he said would help to dispel fears that Fairfax was being stalked by Irish media baron Tony O'Reilly, owner of APN.

"The INL publishing assets are largely high-quality regional monopolies, which will add diversity to Fairfax's earnings," Russel said.

Fairfax said yesterday it had raised A$305 million through a share placement to help fund the acquisition.

It said about 110 million new shares were priced at A$2.77, which according to fund managers was at the low end of a bidding range of A$2.73 to A$2.90.

Fairfax indicated on Monday it would be aggressive in looking for revenue and earnings growth and cost reductions within INL, but dismissed any major job cuts.

Fairfax chief executive Fred Hilmer said while the INL operation was a mature business there was "continuing potential for improvement" from the set of "good quality publications".

Fairfax had identified $2.5 million of synergies, not including benefits to come from other opportunities.

Newspapers in the group had a "wide range of cover prices and rates that will be subjected to some scrutiny", Hilmer said.

Fairfax chief financial officer Mark Bayliss said advertising yields had not been pushed much in INL, which had focused more on volumes.

"There may be some cover price upside as well," Bayliss said.

Brian Evans, who will head the New Zealand business for Fairfax, said it saw "big opportunities" from INL's two Sunday papers, which did not carry a lot of advertising.

"The Sundays are not great earners at this stage," he said, describing them as "development newspapers".

The two big earners were the Dominion Post in Wellington with circulation around 101,000 a day and the Press in Christchurch with circulation around 90,000 a day, Evans said.

Hilmer said Fairfax would focus immediately on the Dominion Post where the merger benefits had yet to be realised. Its margins were well below those of the Press and both were less than the Herald's.

Hilmer said the newspapers had been largely run independently, "almost as a series of silos" and had not taken advantage of their relationship with a major newspaper company.

Fairfax was optimistic it would publish "a version" of the Australian Financial Review and look for other financial publishing prospects in New Zealand.

INL's website, Stuff, was losing $1 million a year and Fairfax would look "at whether there were opportunities to do something there".