With the Fairfax Media share price slumping 8 per cent after a set of results that was largely expected, but an outlook statement that didn’t inspire confidence, it will be a race against time to complete the transformation of the media group before a predator emerges.
Fairfax posted an earnings before interest and tax, depreciation and amortisation (EBITDA) of $506 million ($607 million in 2011), but there are heavy depreciation/capital expenditure charges.
The feeling is the group’s 2013 EBITDA will be closer to $400 million given the structural decline. And the way the structural changes are gathering momentum it might be lower again the following year. The upshot is it is hard to imagine hard copy newspapers surviving seven days a week.
Private equity predators
Fairfax is targeting cost-savings of $235 million, and is in the process of reducing its workforce by 20 per cent over the next three years, as it moves to a digital first platform. It is early days.
There has been strong speculation that a few private equity groups are looking at the company with a view to breaking it up. Fairfax’s enterprise value, which is the market cap plus debt is a tad over $2 billion, which looks good against an EBITDA of $506 million. There have also been a few analyst reports postulating a similar theme. The company can also decide if it continues in its current form or breaks itself up.
The brutal reality is traditional media is going through massive structural changes and blaming it on cyclical issues is a stretch; this downturn in revenue is structural. That’s why there are $2.9 billion of asset writedowns and impairment charges. It is also why News Corp made more than $2 billion of writedowns two weeks ago, most of which was from the Australian newspaper mastheads.
The pattern is this: digital revenue is up, audiences continue to fragment and advertisers are therefore putting more of their dollars into the digital space. This structural change explains why the digital side of the business experienced an increased in advertising yields.
Seek, Realestate苏州美甲美睫培训 and CarSales all have market caps well above Fairfax and their earnings and stock prices keep going up – structural tailwinds.
When the cycle turns there is no doubt the shift will continue to digital with more advertising revenue poured into that space.
Newspapers are not alone in this, they are merely ahead of the curve in terms of bearing the structural pain as audiences increasingly move online. SevenWest revealed TV revenue was up 3 per cent, newspaper revenue was down 5 per cent and magazine revenue fell 6 per cent. Digital joint venture Yahoo!7 lifted revenue 27 per cent.
In the US, which is a good indicator of things to come in Australia, figures show that internet protocol TV (IPTV) is rising at the expense of television.
Recent figures out of the United States indicate that people are increasingly turning from TV to IPTV. Comcast showed a drop of nearly 400,000 TV subscribers in the past year, Time Warner Cable lost 169,000 residential video subscribers and DirecTV reported a loss of 52,000 subscribers in the second quarter. US cable TV is actually free-to-air (FTA) as there is no FTA without a cable connection so to see cable connections being dropped in these numbers is more like people turning off FTA than people turning off cable. Internet customers are on the rise across provider. Time Warner Cable increased it broadband subscribers by 59,000.
Gina Rinehart, the company’s biggest single shareholder, will undoubtedly be watching the results with interest. They could be a trigger for her to call for two board seats.
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