Forager sees strong share gain for NZME if merger approved, less downside if it isn't

Both NZME and Fairfax have worked hard to convince the commission.

NZME shares are likely to rally if the Commerce Commission approves its merger with Fairfax Media's New Zealand unit this week but if the deal is shot down the stock may not fall as much, says Sydney-based Forager Funds Management, which owns 9.1 percent of the newspaper and radio group.

The antitrust regulator will announce on May 3 whether it will allow a merger between the country's two dominant newspaper publishers, having indicated in its draft decision last November that it wouldn't allow it a transaction that would "result in an unprecedented level of media concentration for a well-established liberal democracy" with the potential loss of multiple media voices.

Since then both NZME and Fairfax have worked hard to convince the commission otherwise, arguing, among other things, that they have ended up as minnows in their own advertising markets because of the inroads of global giants Google and Facebook, which between them now control the lion's share of New Zealand's digital advertising market. NZME shares rose 3.5 percent to 90 cents today. It listed at $1 last June and since then has ranged between 99 cents and 49 cents on the NZX.

Daniel Mueller, a senior analyst at Forager, says the fund manager picked up its shares at below current levels when "there was not much in the price for the merger being given the green light".

"If the merger does go ahead there's a lot more upside than if it does not," he said. "It is an asymmetric payoff."

The NZME business was spun off from APN News & Media as a pure-play New Zealand media company, with assets including the flagship New Zealand Herald newspaper, a portfolio of radio stations including Newstalk ZB and the GrabOne daily deals site after APN shareholders overwhelmingly backed plans for the split via a distribution of shares to existing investors. That left some Australian institutional investors with an exposure to a small New Zealand media company that they didn't want, creating natural sellers who have weighed on the stock.

But Forager's Mueller said NZME tended to own more national assets than its counterparts in Australia, where there was more of a regional breakdown, such as Fairfax's Sydney Morning Herald newspaper in New South Wales. "The market, in general, is more attractive for that reason" and Forager also liked NZME's radio assets.

"Post the demerger from APN the company has been unshackled and identified cost savings which will not last forever but will certainly last for the next couple of years," Mueller said. "If the merger goes ahead that will be a bonus." The stock also had an attractive dividend yield, he said.

Other media companies haven't been as supportive. Horton Media, the printing group set up by the family that founded the New Zealand Herald, told the regulator last year that the threat of aggregation in print advertising isn't diminished by digital media, "where it can be seen that the non-exclusive presence of real estate advertising on digital platforms such as proves the limits of that medium's substitutability with print" as "agents generally feel that print gives them better exposure to passive buyers and potential house sellers and therefore attracts listings".

Because the two companies are already sharing printing and distribution, the majority of cost savings would have to come from cutting sales and editorial staff, which Horton said meant there was "no discernible public benefit arising from the merger sufficient to offset the lessening of competition".

Dunedin-based Allied Press argued that the amalgamation would disadvantage the public by leading to a "material reduction" in the number of reporters employed. In December, Fairfax NZ and NZME downplayed the size of likely job cuts among frontline journalists if the regulator makes an about-face and approves a merger this week.

Fairfax Media chief executive Greg Hywood said at a Commerce Commission conference in December that unless the merger was allowed, it would become "endgame" for the company's New Zealand assets, which the Australian publisher purchased for $1.19 billion from Rupert Murdoch's Independent Newspapers Ltd in 2003. The Fairfax NZ assets were valued at just $122.2 million in the proposed merger with NZME, which would see that business poured into NZX-listed NZME and hand the Australian parent $55 million in cash and 41 percent of the merged entity with the shares to be issued at 83.6 cents apiece.

Also in December, Fairfax confirmed it had received an unsolicited offer from a mystery bidder for the New Zealand assets. The National Business Review reported at the time that the offer was for $100 million to $120 million while the Australian newspaper speculated the bidder could be US hedge fund Apollo Global Management. Fairfax New Zealand CEO Simon Tong announced his resignation on March 9.


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