Proposed Fairfax-Nine union unlikely to benefit Domain: Morningstar
Nine Entertainment’s landmark merger with Fairfax Media will be of no benefit to the newspaper house’s property listings business Domain, says Morningstar.
Nine Entertainment’s landmark merger with Fairfax Media will be of no benefit to the newspaper's property listings business Domain, says Morningstar analyst Gareth James.
In a note following the announcement of the deal, James questioned the benefit of the transaction for Domain, saying the company would not realise any of the $50 million in "cost synergies" management expects from the merger.
"If Domain does benefit, it will be via revenue synergies, or cross-selling, but considering Domain is a separate corporate entity, we expect the company will need to pay an ‘arm’s length’ price to access the larger audience," James said.
Domain’s (ASX: DHG) share price rose as much as 9 per cent in trading yesterday presumably, James says, on the prospect the company could gain access to a much larger audience, a key driver of real estate advertisements on its website.
The proposed merger has not materially changed Morningstar's earnings outlook for narrow-moat Domain.
James also questions the impact of Fairfax and Nine's proposal to invest further in Domain, saying additional capital is unlikely to provide a material boost to a company, which already operates a “capital-light” business model.
He suggests the intention to support Domain could alternatively be a "red herring" designed to allay investor concerns about a scenario in which Fairfax sells off its 60 per cent holding in Domain, thereby flooding the market and putting downward pressure on the stock price.
Additional capital is unlikely to provide a material boost to Domain, says James.
Nine Entertainment's (ASX: NEC) acquisition of Fairfax Media (ASX: FXJ), announced on Thursday, will erase the venerable Fairfax family name, with the new media giant to be called Nine.
Although branded as a merger, James says the proposed transaction is better described as an "acquisition of Fairfax by Nine", with Fairfax shareholders set to own 49 per cent of the combined entity.
While the deal itself comes as a surprise, there has been speculation about potential mergers within Australia's media landscape since the loosening of media ownership laws last year.
The deal has been recommended by Fairfax directors, but still needs approval from Fairfax shareholders and the Australian Competition and Consumer Commission.
On the question of a possible Fairfax/Nine sell-off of Domain, James says there are potential buyers.
"We believe the combined group is more likely to sell to institutional investment fund managers over an extended period rather than a single sale to a trade buyer."
"It is difficult to identify an obvious trade buyer with compelling synergies with Domain, other than REA Group which would almost certainly be blocked by the ACCC."
James says there's also a scenario where Nine/Fairfax purchase the remaining Domain shares and privatise the company, but for now this looks unlikely.
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Emma Rapaport is a reporter for Morningstar Australia
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