Digital Futures – Fairfax makes the wrong move in NZ

A few years ago when the “rivers of gold” represented by classified advertising started being diverted off into the likes of TradeMe -Fairfax made a very smart strategic move to buy that company. At the time the merits of the price paid where debated far and wide.

It was apparent to media watchers that Fairfax had a stake in the future of their industry. TradeMe was that future and it has paid off in spades and continues to do so. Newspapers are dying and even with positive tablet numbers the classified ads have gone to more nimble online competitors.

Back then “for NZ $700m in March 2006 which was seen by many as too expensive even though the price represented 15-16 EBITDA” with a follow on payment a year later.

Fast forward to the current  annual report for Fairfax 2012. Anaysis by Bernard Hickey off twitter.

A comment then follows by Valuecruncher

So what are we mere mortals missing here

Lets have a closer look at the Fairfax annual report.

– Group revenue decline of 6% to $2.3 billion
– Digital revenues across the group up 20%

Right on page 2 there looks to be a smart signal that digital is making good gains ( 20%) – that doesn’t look like a sell (digital assets)  signal to me.

Page 12 –

Strong digital growth with total group revenues up 20% in FY12 to $395.7m.
• Leading market share in digital with the No 1 and 3 news sites in Australia.

And what about tablet use for flagship newspapers in Melbourne and Sydney ? The graph below looks like a good result. Now that the new iPad is very high resolution and more publishers have tablet versions this kind of digital growth will level out but is very positive for Fairfax.

In New Zealand ( page 18) – and as noted above- digital revenues are up 13% “on the 102 newspaper and magazine publications and 42 websites” EBITDA $78.1 on Net Revenue of 442.3.

And for TradeMe – EBITDA $110.3 off Net Revenue $146.2 which means that Trademe is contributed MOST of the NZ earnings.

So that makes a Total NZ EBITDA of $188.4 of which 41.4% comes from a declining business and 58.6% from TradeMe which is a dare we spell it out A DIGITAL BUSINESS? TradeMe is the golden goose.

Like Bernard says. TradeMe earnings and revenue are growing while their core NZ business is declining.

What would a smart business do in this scenario?- you would think they would want to learn from their true digital business and do more of that. But it appears selling down the Trademe stake to fund the dumbass part of the company is more attractive to the board.

Here is the slide below. Page 20 of their own report. Clearly no one at Fairfax understands what is happening at TradeMe even though we can see the same numbers they are looking at.

And here is a collapsed version of page 31 summarising the NZ $ results for Fairfax. Trademe – the digital business (that is now only 51% owned by them) is up 11.2% and their dying ( mostly non- digital business) is down by 10%.

Why would anyone think selling down a producing asset that is in the digital space already would be a good idea? Comments welcome.

Update: December 28th Fairfax slashes value of NZ newspaper titles

And we know they recently sold their remaining shareholding in Trademe.

The wider Fairfax group took a A$2.8 billion impairment on its goodwill and mastheads in the 2012 financial year as it reassessed the value of its traditional media assets and attempts to reform itself into a nimble, digital-based company.

Part of that strategy has been for Fairfax to sell out of online auction site Trade Me in three tranches in the past year, generating some $1.72 billion in cash which it’s used to pay down debt and buy technology investment firm Netus. Trade Me’s goodwill was valued at $729.7 million as at June 30.