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Media Reform at Full Tilt; Now for the Circus

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

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Morningstar, Inc.

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Thematic (Sector/Industry)

Australia Media / Thematic (Sector/Industry)

We retain our fair value estimates for <a href="https://www.smartkarma.com/entities/8996" target="_blank" data-smartkarma-citation="entities:8996:1">Fairfax Media Ltd (FXJ AU)</a>, <a href="https://www.smartkarma.com/entities/708" target="_blank" data-smartkarma-citation="entities:708:1">Nine Entertainment Co Holdings Ltd (NEC AU)</a>, <a href="https://www.smartkarma.com/entities/5990" target="_blank" data-smartkarma-citation="entities:5990:1">News Corp Class B (NWS US)</a>, <a href="https://www.smartkarma.com/entities/804" target="_blank" data-smartkarma-citation="entities:804:1">Seven West Media Ltd (SWM AU)</a> and <a href="https://www.smartkarma.com/entities/10374" target="_blank" data-smartkarma-citation="entities:10374:1">Southern Cross Media Group Ltd (SXL AU)</a>, ahead of the likely parliamentary green-light for the Government's Broadcast and Content Reform Package.Contrary to press hyperbole, the proposed relaxation of media ownership restrictions is neither historic nor significant. There was a similar reform back in 2006—one that triggered a flurry of expensive corporate activities and culminated in average value destruction of over 50% for those involved.The same could unfold this time around, in terms of the potential to overpay. Granted, we regard the reform package as overdue, given the archaic basis on which the current rules were devised, with digitally- and Internet-powered alternatives increasingly prominent in media consumption patterns.However, the elimination of the 75% audience reach and the cross-media rules may reignite another expensive mergers and acquisitions, or M&amp;A, "merry-go-around" among media companies, desperate to find ways to stabilise their earnings. The structural headwinds are strengthening, forged by digital incursion, mobile ubiquity and broadband penetration. They are likely to eliminate any cost-savings and synergies used to justify highly-priced M&amp;A. These are the very reasons we view domestic media companies as having no economic moat.As such, we again see no happy ending to any potential frenzy this time around, especially as the reform is unlikely to have a lasting impact on the industry's challenging fundamentals. We would look dimly upon any entity aggressively bidding for assets to extend their exposure to the structurally challenged traditional media. Any scale and synergy arguments to justify the "urge-to-merge" premium should be treated with utmost scepticism.<div class="content-highlight">As for shareholders in media names that become acquisition targets, starry-eyed optimism that drive shares materially above our standalone intrinsic assessments should be used as an exit opportunity.</div>Analyst: Brian Han

We retain our fair value estimates for Fairfax Media Ltd (FXJ AU), Nine Entertainment Co Holdings Ltd (NEC AU), News Corp Class B (NWS US), Seven West Media Ltd (SWM AU) and Southern Cross Media Group Ltd (SXL AU), ahead of the likely parliamentary green-light for the Government's Broadcast and Content Reform Package.Contrary to press hyperbole, the proposed relaxation of media ownership restrictions is neither historic nor significant. There was a similar reform back in 2006—one that triggered a flurry of expensive corporate activities and culminated in average value destruction of over 50% for those involved.The same could unfold this time around, in terms of the potential to overpay. Granted, we regard the reform package as overdue, given the archaic basis on which the current rules were devised, with digitally- and Internet-powered alternatives increasingly prominent in media consumption patterns.However, the elimination of the 75% audience reach and the cross-media rules may reignite another expensive mergers and acquisitions, or M&amp;A, "merry-go-around" among media companies, desperate to find ways to stabilise their earnings. The structural headwinds are strengthening, forged by digital incursion, mobile ubiquity and broadband penetration. They are likely to eliminate any cost-savings and synergies used to justify highly-priced M&amp;A. These are the very reasons we view domestic media companies as having no economic moat.As such, we again see no happy ending to any potential frenzy this time around, especially as the reform is unlikely to have a lasting impact on the industry's challenging fundamentals. We would look dimly upon any entity aggressively bidding for assets to extend their exposure to the structurally challenged traditional media. Any scale and synergy arguments to justify the "urge-to-merge" premium should be treated with utmost scepticism.As for shareholders in media names that become acquisition targets, starry-eyed optimism that drive shares materially above our standalone intrinsic assessments should be used as an exit opportunity.Analyst: Brian Han

Will 2017 Media Reform Lead to Another 'Urge-To-Merge' Frenzy?