The Business Spectator has glowingly described the sale of accommodation website Stayz by Fairfax Media (ASX: FXJ): "There can be no denying Fairfax's $220 million sale of Stayz" writes Ben Shepherd, "is a solid result for the company."
Actually, I'm willing to deny that, or at least question it.
Shepherd writes that Stayz was acquired "for the modest sum of $6 million in 2004." This is 100% wrong. In fact, Stayz was acquired in 2005, for about $14 million, and subsequently combined with Occupancy in 2011, which Fairfax bought for about $29 million. In total, the capital spent on building Stayz, as it currently exits, would have been more than just the price of the acquisition, so I'm not so sure the sale is such a triumph.
Indeed, one has to wonder whether Fairfax really needed to sell Stayz at all. The way I see it, the best way to monetise Fairfax's brands is to associate them with websites like Stayz. The company could, at least, have retained a small equity stake. I think it was a mistake to sell one of the divisions that is actually in a position to grow profits with the help of the Fairfax mastheads.
In his address at the annual general meeting, Greg Hywood, the CEO of Fairfax, said "we continue to confront structural change in our industry as the shift from print to digital continues, as well as persistent cyclical weakness." I don't see how selling Stayz is confronting the shift to digital; it looks a lot more like running away from it.
As an aside, I have no idea what "persistent cyclical weaknesses," are and neither does Google. The world's best search engine directed me to the Wikipedia page for 'cyclical vomiting syndrome' and a few (other) opinion pieces questioning Greg Hywood's judgement.
It wasn't that long ago (in 2005) that Fairfax haughtily rejected the opportunity to invest in Seek (ASX: SEK). Instead, the company chose to waste a fortune buying the old-school print assets of Rural Press. Since that time, Seek is up over 330%, and the Rural Press assets are worth a fraction of what Fairfax paid. This isn't a company with a proud history of smart acquisitions and sales.
Yet I can understand why some might consider Fairfax shares a bargain. The company is priced as if it is a business in decline, yet it owns some absolutely fantastic brands. Certainly, the Domain real-estate business is a valuable asset.
Even if Domain remains the number two real estate website, it should be a reliable earner for a long time to come. However, it's worth remembering that Domain is number two and will never have the pricing power of realestate.com.au, the website owned by REA Group (ASX: REA). Incidentally, Fairfax competitor News Corporation (ASX: NWS) owns a majority stake in REA Group, thus benefitting from the rise of the company that has undermined Fairfax's real-estate advertising 'rivers of gold'.
Since 2008, Fairfax's profits have declined from $369 million to less than zero (and the underlying profit was just $129 million). Meanwhile, REA Group's profits have grown from $22 million in 2008 to $109 million in 2013. REA Group makes most of its money from its Australian business. That business is now almost as profitable as the whole of Fairfax, even if you exclude the write-downs (that seem to occur every year at Fairfax).
Foolish Takeaway
Investors are right to look at Fairfax: bargains can often be found where the market sentiment is darkest. However, I personally don't have faith that management can turn the company around. They have, after all, overseen year after year of precipitous decline. What Fairfax needs is new management, and to retain its top journalists.
Cashflow – a more useful measure than profit in this case – has been declining every year. Including debt, the company is valued at around $2 billion: more than 10 times cashflow. There are plenty of higher quality businesses that can be bought at a similar cashflow multiple, in my opinion.
