Fairfax may float Trade Me - analyst

Fairfax Media could be considering selling off a 50 percent stake in auction and classified website Trade Me, Australian analysts say.

Fairfax is the owner of some major New Zealand newspapers such as the Dominion-Post and The Press.

With multiple changes to Fairfax's board and management in the past six to nine months, Royal Bank of Scotland (RBS) believes the new team, led by Greg Hywood, is more likely to look at corporate activity to close the gap between its shrunken share price and the underlying value of its assets.

It believed Fairfax could use the cash to fund a buyback, pay down debt and raise the dividend, The Australian newspaper reported today. Trade Me founder Sam Morgan set up the company in 1999 and sold it to John Fairfax Holdings in 2006 for $NZ700 million in cash, with an additional $50 million to be paid for earnings targets.

Investors liked the idea of selling a stake, sending Fairfax's shares up more than 2 percent to $A1.32 by early afternoon -- but still well down from more than $A5 in early 2007.

RBS believed the most likely scenario was a partial float of Trade Me, which it viewed as a quality asset "significantly undervalued" in Fairfax's structure. At a price of 15 times full-year 2011 earnings before interest tax depreciation and amortisation, an initial private offering (IPO) of a 50 percent stake in Trade Me would raise up to $A600m ($NZ800m), RBS's Fraser McLeish said.

Fairfax could use the funds to buy back 10 percent of its shares, which would add 8 percent to earnings per share and reduce net debt by $A290m to $A1.2 billion.

Mr McLeish also saw the potential for a sale of Fairfax's radio business, which Fairfax is thought to be undertaking a strategic review on, but at a lower price.

A sale of the assets, which includes mostly AM stations around Australia, would raise $A270m on a multiple of nine times full-year 2011 EBITDA, versus Southern Cross's acquisition of Austereo at 9-1/2 times.

"Changes to the Fairfax board and the management team, as well as the disappointing share price performance have meant that the company is now significantly more focused on closing the gap between the share price and the value of the underlying assets than it has been in the past," Mr McLeish said.

"The initiative that would have the potential to unlock the most value would be an IPO of a stake in Trade Me. We also see potential for a sale of the radio business," he said.