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

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