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Nine’s Love Child

For decades, Nine and Fairfax have been the meat and veg of Australian household news and information. But as Australians’ media diet has evolved into something a little more sophisticated, it is their progeny that will potentially spice things up for investors.

Nine and Fairfax have finally relented and (almost) tied the knot, subject to official sanction from the corporate regulator, Father ACCC. It is a marriage of convenience in many respects, particularly for Fairfax which once strode the Australian media landscape like an Adonis.

As we all know, Facebook and Google have emasculated the core advertising revenue streams of both companies leaving the expensive core content costs exposed. The market value of Fairfax has shrivelled from over $5 billion at its peak in 2007 (when it merged with Rural Press) to a scrawny $1.5 billion today. Nine has kept in better shape at around $2 billion market value but has struggled to stay in shape financially.

Along the way, there has been a dalliance which produced the streaming TV service Stan, for which Nine and Fairfax have admitted an equal responsibility. No longer a toddler, Stan has more than a million fans but like most teenagers is yet to pay its way.

Fairfax continues to boast its proudest asset being the core journalism that has put food on the table for the company since the original John Fairfax bought the Sydney Herald in 1841. He later renamed it the Sydney Morning Herald we still know today.

Ironically, it may be one of Fairfax’s youngest descendants that could put a bit of lead back in the pencil. No, we are not talking about a comeback from Young Warwick.

Domain Group was formerly the real estate tributary of the rivers of gold for Fairfax. It nearly dried up as REA Group now dominates this segment of the advertising market, but Domain is showing real fortitude as a standalone business with Fairfax owning 60% of it.

The potential of Nine’s nationwide commercial television broadcast capability combined with the never-ending appeal of real estate commentary and voyeurism is likely to be very good. Domain already sponsors one of Nine’s bigger franchises, The Block, but could easily take this across the entire neighbourhood.

Domain’s most recent financial result was reasonably good but will likely fare even better with the greater fire power of Nine’s sales team behind it.

Facebook and Google are the real competition for the new Nine group, not just the old enemy, News Corporation although it cannot be ignored. Globally, Google and Facebook command around half of the US$232 billion spent on digital advertising last year, according to eMarketer. Those numbers might be even more pronounced within Australia.

Both Nine and Fairfax have tried valiantly to build a mass of digital subscribers across various platforms, so it will make the job more effective if the aggregated data can be properly utilised.

Fairfax is probably still trying to offload its Community Newspaper group but will struggle to find anyone willing to pay much for it. The group’s New Zealand publishing outfit was prevented from merging with its main opposition there last year and remains a marginal business.

The dilemma for Fairfax is that it guards its journalism so zealously but there is declining value in the publishing businesses. The Nine board will now be making capital allocation decisions across a group of businesses in which publishing will likely feature well down the list of priorities.

Fairfax directors have unanimously approved of the cash and scrip deal and in the absence of any other bids appears to be the best path forward for Fairfax shareholders. The private equity suitors have long since packed up and left the data room.

In a nice twist, Domain has picked up Jason Pellegrino, the former boss of Google Australia and New Zealand, as its new chief executive. This business has plenty of room for growth, an established platform and now, a stronger and broader group sitting around it. Nine’s boss, Hugh Marks, already recognises this and is likely to let Pellegrino have a jolly good crack at unleashing Domain’s real potential.

Initially, Domain will represent only about 20% of group EBITDA with TV still dominating at approximately 36% and publishing 33%. Radio and Nine’s digital division makes up the rest.

Publishing will remain an important contributor but over time it will be the digital elements of the overall business that will determine Nine’s success or failure with the Fairfax merger. Domain has a central part to play in that journey.

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