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Disbelief as Fairfax sells 51% Trade Me stake

UPDATE: One of Fairfax Media's largest single shareholders, Gina Rinehart, has expressed her support for offloading the company's remaining 51% stake in Trade Me. The mining magnate is said to have been pushing for the auction site's sale, among other assets, to pay down debt.

A second school of thought holds that Fairfax managment believed Trade Me's value had peaked (more below).

This theory is backed by a report that some of the $A600 million raised from Trade Me's sale could go into new online opportunities.

In a second development reported by the AFR, Fairfax is said to be close to signing a deal with Netus, a technology investment company run by the ex-heads of Microsoft Australia and eBay Australia. Netus' business model is described as taking a digital idea that has worked overseas, then licensing it for Australia.

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EARLIER: Fairfax Media is selling its remaining 51% stake in Trade Me for $A600 ($NZ810 million) according to Australian media reports

It seems a desire to pay down debt has trumped keeping a stake in the cash cow.

"Absolutely bonkers," is how entrepreur and investor Lance Wiggs describes the move. Mr Wiggs was a key advisor to Sam Morgan on Trade Me's 2006 sale.

"Buying Trade Me was the smartest thing Fairfax did in recent years," Mr Wiggs told NBR ONLINE Sunday morning.

"Selling all of it, if true, is the saddest."

Neither Fairfax nor Trade Me has made a formal statement to the market, but reports hold that investment bank UBS has been retained to sell the stake, and began approaching institutional investors on Saturday afternoon - indicating a decision to sell was likely only taken on Saturday morning.

Shares are understood to be offered at $A3.05 (Trade Me is dual listed; its ASX closing price on Friday was $A3.22).

Growth topped out?
Fairfax-owned AFR says the company is believed to want to cash in on Trade Me's strong sharemarket performance. And according to the AFR, "Fairfax executives believe the business is relatively mature in its home market." For its part, Trade Me says it continues to expand in classifieds, and has plans for major growth in the sale of new goods through partnerships with retailers.

Trade Me founder and one-time CEO Sam Morgan would have had a unique perspective on the sale. Today, Mr Morgan sits on both Trade Me and Fairfax's boards (he did not immediately respond to an NBR ONLINE request for comment).

Since its IPO in December last year, Trade Me's market cap ($A1.6 billion) has grown to exceed that of its parent (Fairfax's market cap was $A1.20 billion at Friday's close)

On August 22, Trade Me reported a full-year profit that rose 8.4% to $NZ75.6 million. Sales increased 13.8% to $NZ142 million. 

$A600m share sale could pay two-thirds of debt
A day later, Fairfax reported a full-year net loss of $A2.73 billion (including a $A2.80 billion impairment as it wrote down the value of its traditional media properties). Revenue fell 6% to $A2.33 billion. Net debt was reduced by $A574 million to total $A914 million over FY 2012, Fairfax said - mostly thanks to the windfall from Trade Me's IPO.

Trade Me was sold to Fairfax in 2006 for $NZ700 million, plus $50 million in earn-out clauses.

The move allowed the Australasian publisher to bring lost classified ad revenue back into the fold.

Fairfax realised around $NZ364 million when it floated a third of Trade Me on the NZX and ASX in December 2011.

It gained another $NZ202 million when it sold its stake down to 51% in June this year.

If the sale of its remaining stake goes through, Fairfax will have realised $NZ1.37 billion for its $NZ750 million purchase; a healthy gain.

However, at a time when the media company is struggling with reveneue from its traditional media business, the move to sell Trade Me has been met with disbelief by some.

Freed from Fairfax interference
"For investors they now have two very distinctly different companies," Mr Wiggs told NBR.

"One needs to go through a rebirth, the other is a giant freed."

And freed is the operative word here. Historically, Fairfax tapped Trade Me for parent company loans, and saddled it with debt.

"Fairfax should emerge in a few years a lot smaller, a lot more digital and pondering how they sold the one asset that was leading the way," Mr Wiggs says.

The entrepreneur said he was really happy for the Trade Me team, but warned, "They need to remain long term and customer focused, and not fall into the quarterly returns trap."

ckeall@nbr.co.nz

More by Chris Keall

Comments and questions
36

They've gone mad. Taking their best division and using it to invest in their underperforming divisions. They should have had a firesale of their worst performing papers instead.

Beware the Fairfax papers' gardening sections, they'll be telling punters to rip up all their flowers and water their weeds next.

A typical Australian view on the maturity of the market. Now why doesn't TradeMe turn it around and offer to buy the fire sale media assets of Fairfax ! The TradeMe Chairman knows what is good and what isn't and he could start to create a NZ based global media and electronic platform company.

Insanity -- should be expanding online presence, not sticking to print.

I don't think Fairfax is "sticking to print."

It's been on the front foot with web and mobile versions of its newspapers, and launching online-only properties.

And of course buying Trade Me to re-capture lost NZ classified revenue was a bold move ... now undone by debt pressure, it seems.

The Stuff website has been going backwards. I don't see any dynamic salvation there.

Whereas Trademe is certainly hitting the retail sector where it hurts. Fairfax is nuts if they think this is the top of the market. They must just be desperate for cash.

No use having a cash cow when your farm is barren of pasture.

That is all

Why should anyone be surprised? Fairfax has been in it's death throes for a few years now. Part of the natural cycle. Enjoy the spectacle. Learn the lessons. Accept the nature of commercial development: entrepeneurial activity. Invest in producers.

Of course. Newspaper Is the new black!

funeral black

They are selling Trade Me at the top and they know it ... their newspapers are screwed and the business model isn't there yet in their other online models .... They are getting the debt off their back while they can, in another two years time when Trade Me's share price has halved they will be very glad they did... there is still a lot of turmoil to play in the online space.. with innovation it's anyone's game.. and it will most likely won't be solutions from a giant corporate .. they just don't breed innovation (but they do buy it ;-)

I don't see the shareprice halving. TME own the classified advertising and online auction space in NZ. We've seen three different companies try and break the TME stranglehold, but all have failed. Maybe another company can get it right, but I wouldn't want to bet against TME.

The real issue for TME is their growth. Will they be able to organically grow at 10% every year, or are they going to acquire their way into growth? Acquisitions are very unpredictable, so that is the bigger risk for TME.

Another incomprehensible strategic move from Fairfax. Selling the profitable, forward-looking part of the business

The people who sold Trade Me 2 Fairfax surprised they sold it. Hello? Didnt u sell it 2 them?

my advice at the time in 07 was holding would most likely generate more value. But try resisting a certain $750m.

Did they consider an IPO. Seems selling 100% was short sighted.

How could they have an IPO when the shares are already traded?

Back in 2006/7 the New Zealand investment community were essentially clueless to the value of Trade Me. The price was seen as shocking.

Lance, I always thought that Flying Pig had a great opportunity to become the NZ 'distribution/gateway partner' for Amazon, back in 2000/2001 - or else move into direct sales of whiteware/consumer goods, etc...They certainly invested a substantial amount in their search/fulfilment software.....Isn't there now the opportunity for Trade Me to either assume that role or more profitably, to become the Australasian/Asian version of Amazon...One commentator here has already asked about internatinal expansion for the Trade Me name/model ...(.How is it that e-Bay has such an uncontested market in Australia?)

Hi Paul
For Amazon New Zealand was certainly not an interesting market in the early 2000s, and barely is now. They also as far as I know focus on their own organic growth, and increasingly just deal direct to us via kindle downloads.
MightyApe, Fishpond, Ascent and others are in the other parts of Amazon's business, and do well, but Trade Me has a huge share of their sales derived from new items, and would dwarf these firms.
eBay in Australia is essentially unassailable, and Trade Me launching head to head against them would be Wheedleish. I always pondered what would happen if Trade Me had taken over Fairfax's Australian Digital assets, and perhaps their are some niches there where they could build or buy. Ultimately I'd like to see Trade Me look at even greater global opportunities, but their strength remains local.

This is surely an excellent move for Trade Me!

This could be the real making of the company - away from the bumbling idiotic Fairfax board and management.

Fairfax has added no value to Trade Me and in fact, never recognized the strategic value brought in by David Kirk.

Dissapointed and surprised that Fairfax didn't take the Trademe brand, model and its operating platform/systems, and exploited the market opportunities in Australia. Ebay is a dog by comparison, and as a major, NZ seller/user of Trademe, it would have helped me in developing an export market there.

Paul Marsden

Interesting they didn't roll it out in Australia - would have seemed the logical. I wonder if now that it is independent of Fairfax, whether they will try. Maybe Fairfax didn't want it to compete with one of its legacy systems.

Why could existing shareholders not have first priority in being offered these shares?
I understand nearly all the shares have been sold to Australian fund managers.
More profits leaving the country unnecessary
I guess it is because we get a better return buying rental properties thanks to our Government policies.

Fairfax is now much cheaper for Gina to takeover completely.

Yuck, love the mining approach to business. rip and strip... lovely, Ron Brierley reincarnate...

Thinking about this over the weekend and I'm not so sure that everyone's incredulity is justified. If you take the (admittedly attractive) view that Fairfax is a complete dinosaur, unable to innovate on its own and sitting atop a mountain of crumbling assets with rapidly diminishing value, then you're likely to see this deal as the final nail in the coffin - an example of a company getting rid of the one asset that could save it.

Another school of thought would suggest that Fairfax an double the amount it bought TradeMe for but, more importantly, it's had five or so years to look deeply at the culture and the paradigm within which TradeMe works and has been busily looking to apply that model in new ways to other initiatives. So if Fairfax could take the money and build some new businesses that, unlike TradeMe, are not nearing the top of their potential growth trajectory, perhaps this is a smart move.

TradeMe is an awesome business, but it's hard to see how they're going to markedly increase value in the mid to long term, take a few of those millions made from the total sell down and apply them to new businesses with potential for mass growth.

Of course there is still the issue of innovators dilemma and the fact that Fairfax would seem to be controlled by people with a fairly traditional view of the world (ie Rinehart, whose idea of "value add" is to dig strip the ground bear - either literally as in mining, or figuratively with her interesting investments).

Either way, Fairfax isn't completely thick and, just in case anyone forgot, Sam Morgan, founder of TradeMe and someone who "gets" the new world, is a director of the company, I'd be surprised if he was a part of this decision without and plan going forwards....

I agree. When you have a choice between selling: (a) a highly liquid asset you can't add too much more value to (TradeMe), or (b) selling the (newspaper) assets which represent your core business (newspapers) its a no-brainer really. Especially since the Board might be able to extract a control premium for the stripped down newspapers business given the rather large shark patrolling the waters in the form of Rinehart. The counter-factual is that there does not appear to be a higher value owner for Trademe otherwise I suspect they would have come out of the woodwork given the Fairfax debt problems have been well publicised.

Why is anyone surprised? they were sinking under debt, they just wrote off all their masthead value. It was either sell Trademe, or sell the publishing. I think this is a good move and will shine a (bright) light on what their "core" business is doing (wrong). I just hope they keep going and fix the rest of the business. Good move. Well done.

The cost of Fairfax borrowings relative to Trademes dividend yield will be driving this sale; along with possible banking covenants, and a better investment opportunity aligned to news publishing.

Fairfax skills are in news publishing, and while Trademe provides a stable earning base, news media is a powerful tool for its owners which includes Rinehart.

Agreed that stuff is stuffed.Their national section which usually has some idot who isnt a trained journalist ranting on about some issue they know next to nothing about hasn't helped their cred, which is a real shame as they have some amazingly good journos.....Adding to their woes, Online advertising has gutted the other income source for fairfax's print media... I foresee much restructuring in the future

More than made money on it & in tough times good assets are usually the only sell-able ones. Distressed buyers of poor assets get slaughtered (only real play for poor assets is like G Hart + consolidate what is viewed by others as dogs).
I'm sure they're disappointed but good strategic move given the limited number of chess pieces they have left + the games rules being re-cast monthly by someone other than themselves

... the vindication of Captain Kirk?

Brilliant move. Now Trade Me has no more noose hanging around its neck, and the kiwi team can really focus on innovation.

Has the Waitangi Tribunal been consulted on this sale???? maybe they OWN the rights to this sale too??? better check it out someone!!!

Question is how can Trade Me innovate? I has a niche in the NZ market but would probably get slaughtered by other entrenched players in the Australian market should it try to enter there.

Question is within NZ what are the new opportunities? I would argue that these could be more elusive than most punters would have you think