Fairfax raids Stuff kitty in lead up to Nine merger

Friday 7th December 2018

Australia's Fairfax Media Group raided Stuff's kitty ahead of a planned merger with broadcaster Nine Entertainment Co, which doesn't see a home for the New Zealand unit.

Stuff paid $22.5 million in dividends to its Australian parent in the year ended June 30, and paid another $10 million in September, financial statements lodged with the Companies Office show. The second return largely drained the Kiwi media group's coffers - cash and equivalents had been almost $11 million at balance date. The company is widely expected to be sold by its enlarged Australian owner.

If Grant Samuel was correct in its independent adviser report on the Fairfax-Nine Entertainment merger, the Australian owner could pocket another $115-135 million. Grant Samuel noted the Kiwi unit's operating performance is expected to keep declining in the short- to medium-term until its transformation beds in, providing it's successful.

New Zealand has been a mixed bag for the Australian publisher, although it's managed to pay itself a dividend in 10 of the 15 years. When it bought Rupert Murdoch's Independent Newspapers Ltd publications it funded about $891 million of the acquisition through related-party loans. That meant that it could extract healthy dividends and sizeable interest payments from the New Zealand division before new ways to engage with news media online undermined its traditional print operations.

Fairfax's experimental responses to the digital challenge saw it buy online marketplace Trade Me for about $700 million in 2006. The media group operated Trade Me as a standalone entity rather than merge it into the publishing operation where the digital classified revenue would have helped replace its declining print advertising 'rivers of gold'.

It then went on to sell Trade Me in tranches through an initial public offering, using the proceeds to repay a mountain of the group's bank debt that was increasingly difficult to service with shrinking advertising revenue.

At the time of the IPO, Trade Me was valued at $1.1 billion and it's now considering competing bids from private equity suitors worth $2.56 billion. One of those potential buyers, Hellman & Friedman, lobbed in a A$2.9 billion bid for Fairfax Media before deciding against mounting a formal offer once it completed due diligence.

During the past 15 years, Fairfax invested $1.15 billion of equity into its New Zealand holding company, the latest injection coming in 2015 as it ramped up spending on a digital-first strategy.

Fairfax has extracted $710.1 million in dividends over the years of which $312.8 million came during the Trade Me sale. That year it also pulled out $403.6 million via a share cancellation. However, that $1.11 billion only accounts for a portion of what Fairfax has reaped from New Zealand.

Interest payments on as much as $1.23 billion of related-party loans and $200 million of preference shares delivered about $1.03 billion during the course of Fairfax's investment, after netting out what the New Zealand unit received from its own loans to other units.

It's no longer shackled with related-party debt with the last $493 million repaid in 2014 and the preference shares long-since converted back to equity. Stuff has an undrawn $25 million bank facility with tranches maturing in November 2020 and 2021.

The New Zealand media group runs the Stuff website and publishes a national network of newspapers including the Dominion Post, Press, and Sunday Star Times. It's been grappling with the declining trajectory of print advertising and accelerated efforts to transfer more of its business online, despite the legacy businesses still delivering the bulk of its revenue.

It tried and failed to merge with rival NZME, arguing that a larger entity would be better placed to withstand the pressures from online ad giants such as Google and Facebook. However, the Commerce Commission didn't believe the leaner business was in the public good if it also led to fewer voices in the media. The regulator's view was upheld by the High Court and Court of Appeal.

Stuff responded by closing a third of its mastheads - largely unprofitable community and regional publications. Its latest accounts show it generated $6.4 million from asset sales in the June year. It also spent $6.7 million buying the 30 percent of Neighbourly and 49 percent of Stuff Fibre it didn't own. Another $4.6 million was spent on property, plant and equipment and $10.3 million on software.

Redundancy payments totalled $7.1 million in the June year, down from a peak $19.3 million in 2016. Fairfax NZ started recording those payments as a separate entry in 2012, and since then has paid out $58.9 million. In 2012, Fairfax employed 2,094 full-time staff and 310 part-timers and casuals in New Zealand. By June 30 of this year, it was down to 1,005 FTEs and 95 part-timers and casuals.

The publisher slashed $65.3 million from the value of its Kiwi print mastheads to just $42.9 million as at June 30, a far cry from the $1.12 billion they were worth in 2003 when the formerly Australian family-owned media group bought the Kiwi business from Murdoch.

Those accumulated impairments and dividend payments left Stuff with retained losses totalling $918.2 million, although share capital of $746.3 million and $258.6 million of reserves built up through amalgamations mean Stuff had equity of $86.7 million.

The hyper-local Neighbourly website has been ascribed $15 million of goodwill, and turned profitable in the 2017 financial year. Fairfax's departing group chief executive Greg Hywood had previously touted the combination of Neighbourly and Stuff's strong online audience as a potential growth engine. However, the New Zealand business wasn't deemed a core business in the Nine Entertainment deal, triggering speculation it will be an early divestment.

Stuff chief executive Sinead Boucher - who has been leading the digital drive - will report to the merged entity's head of Australian community media Allen Williams. The New Zealand senior management team's incentive plan is linked to transforming the publishing business, accelerating growth in existing businesses, and investing in new opportunities for future growth.

Key New Zealand management were paid $2.6 million in the year ended June 30, down from $4 million a year earlier, with share-based payments falling to $190,000 from $658,000.

(BusinessDesk)

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