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New Zealand a 'dangerous hunting ground' for media acquisitions, Morningstar says

Tuesday 9th January 2018

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New Zealand's media industry has been a "dangerous hunting ground" for international acquisitions and growth in the sector is elusive, according to research house Morningstar.

A report by Morningstar on potential expansion by ASX-listed Southern Cross Media Group says the company's desire to expand into New Zealand has been an open secret in the industry, so recent media reports that Southern Cross has walked away from that ambition after failing to buy MediaWorks' radio assets have come as a relief due to the tough environment for media companies here.

"We appreciate management's desire to grow and its confidence to operate a bunch of regional-type radio stations in New Zealand," Morningstar equities analyst Brian Han wrote. "However, history plainly shows growth is elusive in the Shaky Isles." Han says Southern Cross should focus on its Australian assets, as it has undisputed market leadership in the radio industry and a number of regional TV stations.

The Morningstar report references several media acquisitions over the past two decades which have missed expectations. That includes the $1.5 billion purchase by APN News & Media of Wilson & Horton, the publisher of the New Zealand Herald, in 2001. The unit's earnings before interest, tax, depreciation and amortisation have dropped to $60 million from $150 million since then. The $1.2 billion purchase by Fairfax Media Group of Independent Newspapers, the publisher of the Dominion Post and the Press, in 2003, also saw that business' ebitda drop below $60 million in the latest year from more than $120 million at the time of purchase. 

"We will not even bother detailing the trouble Prime Television had with a Kiwi TV network (now owned by Sky Network Television) in the early 2000s, or the pain currently being suffered by Oaktree Capital Management with its ownership of struggling MediaWorks," Han said.

In November last year, the Fairfax-owned Australian Financial Review reported Southern Cross failed to come to an agreement with Oaktree for the MediaWorks radio assets, which includes stations such as The Edge, The Breeze, and The Rock, as it had no interest in buying the MediaWorks television business. Southern Cross didn't want the TV business, which holds TV3 and Four, whereas Oaktree sought a whole-of-company offer for MediaWorks, the AFR said. 

Morningstar said its fair value estimate for Southern Cross Media was A$1.20 per share, and it's projecting average revenue growth of 0.9 percent per year for the next three years, with ebitda margin to drop about one percentage point to 24.9 percent. The company doesn't have an economic moat, or competitive barrier, to bolster its revenues, and there are intensifying competitive dynamics in the free to air television and radio industries, it said. 

Southern Cross shares recently traded at A$1.18 on the ASX. 


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