Hurdles ahead for Fairfax's gamble

Paula Rebstock. Ross Setford / Getty Images

John Fairfax Holdings' planned $700 million-plus acquisition of internet auction site Trade Me may yet run foul of the Commerce Commission.

Chairwoman Paula Rebstock suggested in a speech at the Mergers and Acquisitions summit in Auckland on Monday that online advertising and newspaper advertising might be part of the same market.

Previously, the commission had regarded online and newspaper advertising as complementary but separate markets.

However, after Fairfax's acquisition last year of publications linked to the Rodney Times for $10.8 million it began to change its mind.

"The commission, while defining a distinct print media advertising market, acknowledged that the extent to which it faced competition from online advertising was increasing," Rebstock said.

"The commission intends to consider these issues further in assessing the competitive impact of this proposed acquisition."

Bruce Wolpe, Fairfax corporate affairs manager, said management would not comment.

"There are no developments on which we have any comment at the present time and we are working with the commission and will continue to do so," said Wolpe. However, Fairfax NZ chief executive Joan Withers said the company was pretty clear there was no issue and the dialogue with the commission was ongoing.

The commission is an independent, quasi-judicial Government entity whose role is to stop anti-competitive behaviour. It has become a lot more active in the past year, reviewing a record number of mergers, including that of PGG and Wrightson, which created a rural services giant.

A day after the Trade Me deal, Australian analysts' views on the price Fairfax paid are mixed. The price values Trade Me at nearly 27 times this year's trading profits of $26 million and 15.6 times next year's $45 million trading profits.

"It looks like a big price to pay for something that is defending their own revenue," said Shaw Stockbroking analyst Greg Fraser.

Fairfax NZ's classified print revenue last year was roughly $170 million - that was a far cry from Trade Me's price.

"The conundrum I'm trying to solve is whether paying $750 million to defend $170 million in classified revenue is actually a good deal or not," Fraser added.

Merrill Lynch analyst Patrick Russel viewed the buy as a "great acquisition, which will add value over time".

Russel forecast Trade Me to be earnings neutral in the first year and accretive thereafter.

"We view the acquisition positively. While the price appears high, this is not surprising given its leading positioning, growth profile and the fact that we understand the sale was highly contested," said Russel in a research note to clients.

He also noted that while this gave Fairfax a stronghold in New Zealand's online space, the Australian newspaper publisher has historically been considered a "laggard" in building and buying prominent websites in its home country.

Fraser agreed, saying Fairfax "needed to ensure they had a number one website somewhere".

Deutsche Bank analyst Andrew Anagnostellis also called the purchase "expensive" but "sound".

"Fairfax is moving aggressively to recapture lost momentum in the online advertising segment."

Fairfax shares closed yesterday at A$3.95, up 5Ac for the day.

TRADING UP

* Fairfax will pay $700 million plus for Trade Me and another $50 million if it meets earning targets.

* The pricetag values the website at nearly 27 times this year's trading profits of $26 million.

* The sale will bring founder Sam Morgan $227 million for his 32 per cent stake.