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3 media companies that could soar from here

Media companies like newspaper publishers and free-to-air broadcasters are under the pump, with their respective industries facing structural decline.

The move of advertising away from those types of traditional media is ever-present, and some estimates in the US suggest that two companies, Google and Facebook suck up as much as 75 cents of every dollar in digital advertising in the US.

Assuming those trends are replicated in Australia, the old-world media faces its traditional business being obliterated.

We’ve suggested for years that there’s not enough room for three commercial TV broadcasters in Australia – particularly in a declining advertising market. As for newspapers, well, their writing was on the wall years ago.

But there are other forms of media and advertising that are still very popular and profitable. Radio is one, while outdoor advertising through still and digital billboards is booming. Witness the growth in APN Outdoor Group Ltd (ASX: APO), oOh!Media Ltd (ASX: OML), QMS Media Ltd (ASX: QMS) as we outlined earlier this year.

But they aren’t the only ones.

Geoff Wilson from Wilson Asset Management recently outlined a number of media stocks his funds were buying, including Southern Cross Media Group Ltd (ASX: SXL) and APN News and Media Limited (ASX: APN).

Southern Cross generates around 80% of its revenues from radio and also has an affiliate deal with Ten Network Holdings Ltd (ASX: TEN). Southern Cross is also likely a takeover target if the relaxation of media rules goes ahead as expected. The company is also generating strong earnings growth and appears reasonably cheap.

APN News and Media has just received approval from shareholders to demerge its New Zealand assets (NZME) and will now explore a merger of NZME with Fairfax Media Limited’s (ASX: FXJ) New Zealand business. That leaves APN with:

  1. ARN – Australia’s leading radio network
  2. Adshel – The number one street furniture advertising network in Australia and New Zealand
  3. Cody Outdoor – an outdoor advertising business in Hong Kong and,
  4. ARM – a regional media business in Australia

The combination with Fairfax New Zealand should deliver significant synergies although it still requires regulatory approval. Shareholders in APN will receive one share in NZME for each share they hold in APN.

The third and last, but by no means least, company is Fairfax Media itself. Fairfax is transforming itself into a digital media company as its newspaper circulation continues to dwindle, plus it has one asset that could be worth as much as the market is valuing the whole company – and that is the real estate advertising business of Domain.

While Domain still lags behind market leader REA Group Ltd’s (ASX: REA), it is slowly catching up, as we discovered in November last year.

Foolish takeaway

The market may be undervaluing the assets owned by Southern Cross, APN News and Media, and Fairfax – which could be an opportunity for savvy investors.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.