Did ComCom make the right decision rejecting the NZME-Fairfax NZ merger?
The Commerce Commission has rejected the proposed merger of media companies NZME and Fairfax New Zealand.
“Following our draft determination the applicants significantly altered their submission on what the state of the market would look like without the merger. The details of those submissions are confidential; however, we do not consider the scenarios presented to be likely outcomes. In our view, without the merger NZME and Fairfax will be increasingly focused on their online businesses as their print products diminish in number and comprehensiveness over time,” commission chairman Mark Berry said.
"Having reviewed all the evidence, our primary concerns remain that this merger would be likely to reduce both the quality of news produced and the diversity of voices (plurality) available for New Zealanders to consume. Competition between NZME and Fairfax leads them to produce higher quality content than would otherwise exist with the merger. This competition incentivises investment in editorial resources, motivates journalists and editors in their day-to-day work and acts as a safeguard to plurality.
“In our view, the merged entity’s competitors would not be able to constrain it in any real way from making cost-cutting decisions that reduce quality and plurality. The extent of internal plurality is also discretionary on the part of the media owner and we do not regard promises to maintain current levels as a sufficient safeguard on future editorial decisions.
“While we cannot weigh in dollar terms the net benefits against the detrimental societal impacts we expect to see, in our assessment this is not a finely balanced decision. We decline to grant authorisation.”
In the first hour of trading on the NZX, shares in NZME fell 16% to 75c on turnover of $3.7 million.
Competition law specialist Andy Glenie of Anderson Creagh Lai said he agreed with the Commission’s interpretation of the law.
“They haven’t really moved that far [from the draft determination],” he said.
“The main legal issue is media plurality, which is a possibility for an appeal to the High Court because it’s a neatly packaged legal issue and I can see them challenging that. But the question is whether NZME and Fairfax have really got the stomach to go through this again.”
However, “I don’t think an appeal would succeed on that basis.”
In a statement to the NZX, NZME said it was disappointed by the decision and would review the Commission’s written decision.
“NZME’s strategic focus continues to be on priorities identified to drive shareholder value; growing audience reach, retaining print revenue, returning radio revenue to growth, growing new revenue streams, practicing effective cost and capital management and developing our people and talent.”
Portfolio manager Daniel Mueller of Australian fund manager Forager, owner of about 9% of NZME, said he was disappointed but not surprised by the merger rejection.
“It definitely could have created some value for shareholders had the merger been allowed to go ahead,” he said.
“We saw the merger as potential upside, or optionality ... From our point of view the investment case is not premised on the merger going ahead ... We still think the shares are cheap and not reflective of the prospects of the company.”
Rival media company MediaWorks, owner of TV channel Three and a portfolio of radio stations, said it welcomed the decision.
“This is the right outcome and ensures New Zealand can continue to have plurality of media and the widest range of viewpoints available to the audience. We hope this now opens the door for other opportunities that could see partnerships between local media organisations that don't have a detrimental impact on competition.”
NBR VIEW BACKSTORY: The StuffMe Merger from NBR Radio on Vimeo.
The two companies sought permission to merge in May 2016, saying the move was “in response to the dramatically transforming media landscape.”
According to their merger agreement announced last September the deal would involve NZME buying Fairfax New Zealand from its Australian parent in exchange for $55 million in cash and shares giving Fairfax a 41% stake in NZME.
At the time, the companies said the merger would give them a combined audience of 3.7 million New Zealanders and improve their ability to compete in the digital advertising market against global players.
The combined business would have had revenue of $766.2 million in the year to June 2016 and earnings before interest, tax, depreciation and amortisation of $135.2 million.
A draft determination issued by the Commerce Commission in November rejected the deal, saying it could substantially lessen competition and it was not satisfied the public would benefit from allowing it.
Shares in NZME, which listed on the NZX last June after a demerger from its Australian parent APN, hit a closing low of 49c after the draft decision but have since rallied as high as 95c as some investors saw value in the stock.
Two Australian institutions have been buying NZME over the last few months. In February Forager Funds disclosed a stake of 9%, up from 6.9% last November, while a long/short fund run by Auscap this week disclosed it had acquired a 6.7% stake.
In December NBR revealed a mystery buyer had tabled a potential offer of $100-120 million for Fairfax NZ if the merger was rejected by the commission.
The offer was made in writing on November 28, although it was not revealed to the commission.
The day before NBR published the story, Fairfax Media chief executive Greg Hywood told the Commerce Commission conference in Wellington “it becomes end game” for Fairfax NZ if the merger was disallowed.
NZME publishes the New Zealand Herald daily and Sunday newspapers and their associated website nzherald.co.nz, as well as several other publications including 23 community papers and six magazines.
It also owns nine radio stations including Newstalk ZB.
Fairfax NZ publishes nine daily papers, including the Dominion Post and the Press, the stuff.co.nz website and 62 community papers.
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