Fairfax share issue is temporary relief from growing debt concerns

Despite a successful half billion dollar share issue yesterday, Fairfax Media remains saddled with a mountainous $2 billion debt. The company, whose flagship publications are the Australian Financial Review, the Sydney Morning Herald and The Age, is hoping to raise money through an offer to retail shareholders opening tomorrow, however the proceeds won’t be known until early April.

The shortfall following a massive half-year loss leaves Fairfax dangerously exposed to a banking takeover and markets were unimpressed. After coming back off a trading halt shares finished the day at 88c down 5 percent. Shares went down another cent today. Fairfax announced yesterday it had sold $500m of shares to institutional investors. In a media statement (curiously and pointlessly embargoed in these Internet times as “not for distribution or release in the US”) chairman Ron Walker claimed to be happy with their institutional entitlement offer taken up almost entirely by existing shareholders. The revenue will pay off a substantial portion of the company’s syndicated loans that mature in 2011 and 2012. “This successful equity raising considerably enhances the financial position of the company in these difficult economic times,” Walker said. Fairfax made another ASX announcement about the retail component of the offer. It wanted to raise another $184 million through an accelerated non-renounceable entitlement offer.

Fairfax halted share trading last Thursday while it considered raising funds. That came three days after it said it did not require a capital injection despite a $365.2 million net loss for the final six months of 2008. Presenting the half year results (ppt), new CEO Brian McCarthy said Australian and New Zealand publishing markets were worst affected by the economic conditions. The EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) for the Sydney and Melbourne metro dailies went down 23 per cent. New Zealand’s performance was even worse, dipping 29 per cent.

Rupert Murdoch’s News Ltd is also facing massive debt issues. And last week the Denver Rocky Mountain News published its final article after 151 years. Publishers, E. W. Scripps Company, announced the paper had been up for sale but attracted no credible buyers. They said losses of $16 million last year could not be sustained. The Rocky Mountain News’s 2008 losses are a pittance compared to Fairfax’s half yearly figure. Andrew Landeryou at Vexnews says Fairfax is on the verge of liquidation because it is close to exceeding key profit to interest/debt ratios that would allow banks and bond holders seize control of the company. He quotes an unnamed industry observer, “They’ve borrowed many millions on The Age and Herald’s mastheads, which we doubt they could get anything much for in a firesale.”

Landeryou’s source repeats the point Fairfax dependency on the classified “rivers of gold” is diminishing quickly as advertising moves online. In Australia the internet is a $1.7 billion advertising market compared to television at $4 billion and the industry as a whole at $12 billion. Fairfax’s classified quandary was featured on last Sunday’s ABC’s Inside Business. Media analyst Roger Coleman told the program newspaper groups were vulnerable to new Internet competitors. “Why give up…$100 million operating earnings, to only earn $2 million to $3 million online?” McCarthy will need to address this headache if he plans to keep his job by the time the next six monthly figures emerge.


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