John Fairfax Holdings Ltd., Australia's second-biggest newspaper publisher, bid A$2.8 billion ($2.2 billion) for regional media group Rural Press Ltd., kicking off a long-awaited round of media takeovers.
Rural Press, a newspaper publisher with radio interests mainly in farming areas, and Fairfax have long discussed joining forces, but the timing of the deal suggested Fairfax was beefing itself up ahead of a round of takeovers expected next year.
Investors sent Rural Press shares up 15 percent but the price remained below the implied value of Fairfax's cash and scrip offer, indicating no one expected a higher offer to emerge.
"I would have thought this would be quite difficult to better. It's a pretty healthy price that Fairfax is paying, albeit a large proportion is scrip," said Neil Boyd-Clark, a portfolio manager with ABN AMRO Asset Management.
Fairfax shares fell 1.2 percent to A$5.15 amid concerns it was paying too much.
"You're paying a high price for a business that's already quite efficient and doesn't necessarily offer you much in the way of organic growth opportunities," said Boyd-Clark.
The offer values Rural Press at 23.5 times forecast earnings for this year compared with Fairfax's earnings multiple of 21.5 and multiples below 20 for rivals West Australian Newspapers Holdings Ltd. and APN News & Media Ltd.
Fairfax said it expects the merged group to save at least A$35 million a year within 12 to 18 months.
"This merger positions the group tremendously for Internet expansion," Fairfax Chief Executive David Kirk said in a statement on Wednesday.
Fairfax said Rural Press directors had unanimously recommended the bid in the absence of a better proposal, and said the takeover would boost Fairfax's earnings per share from the 2008 financial year, excluding integration costs.
"There are wins on both sides. It'll strengthen the management team at Fairfax and it gives Rural Press shareholders a nice profit," said Doug Little, investment director at Constellation Capital Management.
Likely Targets
The offer, agreed by the Rural Press board, includes about A$1.7 billion for Rural Press' ordinary shares and about A$1.1 billion for its separately listed preference shares.
At the top end, the offer per ordinary share is worth A$14.22 per ordinary share based on Fairfax's last trade at A$5.15, pitching the bid at a 21 percent premium to Rural Press's Tuesday close of A$11.75.
Fairfax is seen as one of the most likely targets when new laws come into place in 2007 allowing owners of one media platform -- newspapers, television or radio -- to own another media platform in a single market.
Looking to block or influence the outcome of any takeover of Fairfax, its bigger rival, Rupert Murdoch's News Corp., bought a 7.5 percent stake in October, while broadcaster Seven Network Ltd. said this week it had bought a stake of less than 5 percent.
Positioning for media takeovers next year, Seven recently sold its TV, magazines and online businesses into a joint venture with private equity giant Kohlberg Kravis Roberts, while Publishing & Broadcasting Ltd.sold its media interests into a joint venture with private equity firm CVC.
With Seven cashed up and the joint ventures seen as vehicles that can easily take on heavy debt to fund multi-billion dollar takeovers, Fairfax remains vulnerable despite beefing up.
"It makes Fairfax a bigger company. But size doesn't seem to be much protection these days," said Boyd-Clark.
Fairfax is offering A$3.30 in cash and two Fairfax shares for each Rural ordinary and preferred share or A$1.80 in cash and 2.3 Fairfax shares.
In addition Rural Press will pay a special dividend of 57.143 cents per ordinary share and 62.858 cents per preferred share.