Nine and Fairfax merger all about survival

Nine Fairfax merger media ASX
Mainstream media in recent years has been facing major declines in both audience and revenues.

One thing should be absolutely clear about the A$4.2 billion merger between Nine Entertainment (ASX: NEC) and Fairfax Media (ASX: FXJ) – it is all about survival for both of these once proud media companies.

As the rivers of gold slowly turned into a dry creek of clicks for Fairfax, the owner of The Age and The Sydney Morning Herald was forced into many years of relentless cost cutting, which continues to this day.

There have been bright spots – such as the performance of the largely new media Domain real estate arm – but in overall terms Fairfax has been shrinking its costs to match its withering revenue and profits.

Finding the digital “creeks of clicks” is essential

In really simple terms, the arrival and success of the international internet behemoths including Google, Facebook, Apple, Amazon, Netflix and thousands of others – along with almost ubiquitous smartphone use – has literally shredded traditional print advertising.

It is a very similar story for Nine Entertainment.

Where once owning the highest rating free to air television stations in Melbourne and Sydney was literally a licence to print money, now it is nothing of the sort as digital interlopers of all sorts from YouTube and Instagram to Facebook and Netflix steal eyeballs away.

Advertising revenue is being splintered

Vital advertising revenue is now splitting into thousands of different directions, with free to air television just one option of many for advertisers.

It is the splintering of advertising rather than any real failure of journalism that has led to the shrinkage in both companies, although the lack of advertising dollars has obviously been accompanied by significant cutbacks in the funding available for that journalism.

Media values have plummeted

The rapidity of that turnaround is shown by the fact that in 2006, Nine was sold to investors by James Packer for A$5.5 billion.

Now, 12 years later, the combination of Fairfax and Nine together is worth just A$4.2 billion, with those dollars themselves worth a lot less due to the passage of time.

The game for this merger is all about sharing costs across the various platforms and growing those synergies over time.

In reality it is a fairly simple takeover of Fairfax by Nine with Fairfax shareholders compensated for the departure of the Fairfax name by getting the 22 per cent financial premium.

Which is why Fairfax shares jumped and Nine shares fell after the announcement.

Cross platform sharing the name of the game

Video is common on newspaper websites so it makes economic sense for much of that video to be sourced from Nine’s cameras.

Likewise, news bulletins on Nine could have much of the information provided to them by multi-skilled journalists working on The Age or Sydney Morning Herald.

Selling advertising across different platforms should increase revenues and begin to reconsolidate some of those splintering advertising streams.

It might be a very foreign way of working for many of those at Fairfax and Nine but it is the sort of multi-skilling that has long come naturally to internet players both large and small.

This sort of cross platform sharing is predicted to save around A$50 million in costs a year – money the combined group will hopefully use to further reformat their offerings to suit a smartphone audience.

Big media needs to think like start-ups do

There will also need to be significant restructuring to ensure that potentially lucrative digital growth options are explored and enjoyed, just as they have for countless digital start-ups including smallcaps.com.au.

Failing to change with the times and become true internet natives is not an option for both Fairfax and Nine and they arguably stand a better chance of making the transition as one strong company rather than alone.

For many years the Federal Government prevented large print groups from merging with large being television stations because the combination would have been too powerful and would have dominated too large an audience.

It is one of those classic ironies that exactly such a merger now is being grasped with a hint of desperation just to ensure the survival of two of the groups those laws were designed to keep apart.

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