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Are private equity buyers are circling these listed media assets?

If you are nervous about the latest bout of market volatility, you might take some comfort from reports that corporate interest in risk assets is still strong even as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is whiplashed by a potential global trade war.

This isn’t a time to be retreating from the market, at least not yet, as I still believe that the earnings and economic growth story is still intact.

A report in the Australian Financial Review that Anchorage Capital Partners is interested in buying the regional publishing assets of Fairfax Media Ltd (ASX: FXJ) and News Corp (ASX: NWS) should add to the upbeat mood on the market as the top 200 stock index attempts to recover from its two-day plunge.

While this is only speculation, Anchorage has long been thought to be keen on owning these regional businesses. When Fairfax received indicative bids from private equity groups TPG Capital and Hellman & Friedman last year, the AFR reported that Anchorage was hoping to take Fairfax’s Australian Community Media (ACM) division off their hands.

It also makes economic sense to merge News Corp’s regional media assets with ACM to achieve better economies of scale and save on distribution and editorial costs. Distribution and logistics would certainly cost more in the country than metro areas.

The question is who motivated Fairfax would be to sell ACM. It is estimated by some analysts that ACM could be worth a little over $200 million. This compares to Fairfax’s market cap of about $1.6 billion. That’s hardly a cash windfall for management even if you added in a 20% takeover premium.

On the other hand, ACM is still seen to be a fairly significant earnings contributor to Fairfax as it’s the second largest revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) contributor to the group.

Fairfax may want to keep this division to better diversify its income streams as regional and metro media can often move to the beat of different market drums.

I am not suggesting that such a deal cannot happen. If anything, I have been predicting a significant pick-up in merger and acquisition activity on our market this year and the media sector looks ripe for consolidation now that media ownership laws have changed and the earnings outlook has stabilised.

You only need to look at Nine Entertainment Co Holdings Ltd’s (ASX: NEC) half year results last month to see evidence of the improved outlook for the sector.

There’s as much chance of M&A happening in regional publishing as there is in just about any other part of the media sector where valuations have been depressed for a very extended period.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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 Scott Phillips.

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