For most investors buying either of these businesses with their “old” media assets has been a value trap as the earnings power of these assets has continued to diminish. Over the last 12 months however, there have been signs that perhaps the worst is behind them, particularly for Fairfax.
With Fairfax spinning off New Zealand-based Trade Me (ASX: TME) in 2011 and then selling the remaining 51% holding in 2012, its balance sheet has dramatically improved. Interestingly, Trade Me has a market capitalisation of $1.6 billion, making it about the same size as Fairfax. This sale has helped Fairfax repair its balance sheet and reduce net debt from $717 million to a more manageable $198 million.
APN on the other hand still has a stretched balance sheet. This week the company announced a restructure of its Digital and Australian regional media divisions. The restructure aims to cut costs out of the divisions and also streamline the link between APN’s digital ventures and its other media assets. In 2012 APN formed a joint venture for its Outdoor Division through the sale of a 50% share, however without another big asset sale, significant cost cutting is required to shore up the balance sheet.
APN basically has two things going for it. First, the radio and outdoor divisions are quality businesses that are more stable than the “old” newspaper assets. Second, APN’s focus is on regional newspapers, which have so far proved to be more resilient due to their local news content than their city cousins. As the Chairman of APN commented this week, “APN believes there is a strong future in regional newspapers to provide local news to local communities.” Investor Warren Buffett is of a similar opinion and this was the basis for his recent newspaper media purchases.
Investor appetite for “new” media assets over “old” media assets is perhaps best summed up in the performance of Trade Me compared with APN, Fairfax and the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) in the following chart. This past performance though, doesn’t necessarily mean “new” media is the best current investment option!
Source: Google Finance
While buying a cheap stock that could go up significantly is always tempting, investors firstly need to be very sure the company will survive. High debt levels and declining earnings make the investment case difficult to judge.
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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.