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NZME demerger risks giving Fairfax upper hand in tie-up talks, Credit Suisse warns

Tuesday 21st June 2016

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The demerger of NZME from its parent, APN News & Media, risks giving rival publisher Fairfax Media the upper hand in the detailed talks still to come to create a merged media group from NZME and Fairfax's New Zealand assets, say investment advisers Credit Suisse.

In a note to clients dated June 16, senior Credit Suisse analyst Arie Dekker says if the NZME demerger "is completed before negotiations are completed on transaction terms with Fairfax Media, then we wonder whether Fairfax Media may have a negotiation advantage."

The NZME demerger has gained shareholder and regulatory approvals, followed swiftly by the sale by APN of its Australian regional newspaper titles to News Corp for A$36 million. That leaves APN as the owner of a still-profitable Australian commercial radio network. NZME is set to become a separately listed New Zealand newspaper, online and commercial radio group.

"While the motivation for the transaction should be strong for both parties, as a standalone listed entity facing declining earnings and a reasonable amount of debt, we suspect NZME's motivations could be somewhat stronger than Fairfax Media's, with its strong balance sheet and larger Australasian business," wrote Dekker.

While the merging parties have so far discussed leaving Fairfax Media with a minority shareholding in the merged New Zealand business, the Credit Suisse note speculates that Fairfax would rather quit its New Zealand media assets completely than opt for "share-based consideration in the merged ... business."

If so, that could raise "some challenges given what we consider to be reasonably high gearing in NZME's business," Dekker said. "It is important that this desire on the part of Fairfax Media doesn't drive too much case consideration and/or assumption of debt in Fairfax NZ. We would not want to see the benefits of the merger undermined by too much debt."

Dekker also suggests the merged entity would look again at introducing a paywall "for content that is unique", the concept having been abandoned by NZME because it believed it would lose market share to Fairfax's Stuff website, where a strategic decision has been made not to introduce a paywall.

"If the NZME-Fairfax NZ merger goes ahead, (the) potential for paywall implementation may also come back on the agenda, given the competitive constraints of implementing a paywall against a competitor site where a lot of the content has overlap may be able to be better managed."

Credit Suisse assumes the Commerce Commission will approve the proposed merger, for which NZME and Fairfax have sought authorisation.

The Credit Suisse report also warns shareholders of the merged entity to be aware of "some meaningful tax liabilities" hanging over NZME, including a $64 million dispute involving certain financing transactions. The Inland Revenue Department is seeking to impose penalties, although some $48 million of tax losses are available to NZME to offset an adverse finding. A further $8 million to $14 million of potential tax liability relating to deductions denied under New Zealand's thin capitalisation regime are also at issue for NZME.

"We see this as an area of uncertainty for investors that can't be ignored," the report says.

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