Fairfax Media (FXJ) Update

Submitted by Craig Strzelecki on 2 April, 2007 - 18:57

Fairfax Media (FXJ) is "one of the cheapest media stocks in the sector" according to market analyst Macquarie Research Equities. The proclamation of the new media rules is a game changer for media in Australia. In short, the change allows players to move to two-media-to-a-market, which the anlayst believes will be a significant value driver in the future, and will leave players who do not amalgamate at a relative competitive disadvantage. The advantages of moving to the two-to-a market model for
media include:

1) Cross-promotional synergies – ie the ability to promote the print product on TV, and the TV product in print.
2) Revenue synergies – PBL has proved that selling two media (magazines and TV) does not have to be on a discounted, bundled, basis. Put simply, a reduction in the number of owners of advertising outlets can only be positive for revenue growth (pricing power).
3) Other finance and administration savings, as well as group buying advantages.

Additionally, and specific to newspapers, the analyst believes these companies are about to reap the benefits in advertising dollars of the significant on-line presence – not just in Australia but probably industry-wide. The analyst rejects comparisons of media deals in the US at 9.6x Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) as being irrelevant. The markets in which those companies operate do not allow cross media ownership, so multiples are depressed because the operators which are best equipped to run two media to a market are legislatively prohibited from doing so, unlike Australia, from Wednesday. With this in mind, one of the cheapest media stocks in the sector is FXJ, especially with the RUP merger, which the analyst estimates injects around 50c/share of value into FXJ and underpins a valuation for the company of $4.71/share. Once the merger is completed, FXJ will be trading at around 11.4x 2007 EBITDA (pro-forma, inclusive of $35m in synergies, at $4.98/share). The market analyst have included a break-up valuation on the company which shows that even this is conservative. Adding a 20% takeover premium takes the valuation to $6.42/share.

The analyst retains Fairfax Media as their key recommendation for exposure to sector consolidation. The analyst believes that the benefits of owning two media to a market will be a compelling value driver going forward, with the on-line option implicit in the FXJ business also significantly presently underpriced.

Fairfax Media Limited is listed on the Australian Stock Exchange (ASX) under stock code FXJ. You can view their investor website here. FXJ was listed on the ASX on 8 May, 1992. Ronald J Walker is the Chairman for Fairfax Media and David Kirk us the CEO. The company is involved in information and entertainment publishing in newspaper, magazine and electronic formats. Fairfax Media Limited [ASX:FXJ] is Australasia's largest newspaper publishing group. In Australia, mastheads include The Sydney Morning Herald, The Age, The Australian Financial Review, BRW and The Sun-Herald. Its New Zealand mastheads include The Dominion Post, The Press, The Sunday Star-Times, TV Guide, and Cuisine. In addition, Fairfax publishes regional and community newspapers, financial and consumer magazines. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade FXJ. Check your charts and good luck with your share trading!

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