The stockmarket has anointed Fairfax the loser in its evaluation of the $1.3 billion carve-up of Southern Cross Broadcasting.
Fairfax shares shed 13c yesterday to close at $4.55, after touching a low of $4.50. Its partner in the carve-up, Macquarie Media, rose 2c to $4.96, while the shares of the target, SBC, jumped 84c to $17.28.
The purchase price is $1.08 billion, or $17.41 a share. The difference between the cash price and the total value is the debt in SBC.
Fairfax's is buying SBC's radio assets and the Southern Star TV and film production house for $480 million, a big sum of money for assets with below average earnings.
Combined, the radio and Southern Star earned around $30 million before interest and tax last year (although that amount will increase with John Laws leaving 2UE).
Fairfax is on a 19.5 times earnings multiple, so there would be a small boost in the deal before any synergies.
But at least there's some upside in these businesses, and some benefits from combining them with the newspapers in Sydney and Melbourne and the online website in Brisbane and the one planned for Perth.
How Macquarie Media plans to make money is beyond many analysts.
Macquarie Media will be purchasing SBC's television assets for $820 million. That consists of the regional TV affiliates of Ten across the country and Seven in a couple of small markets. (It also includes the 13.8 per cent of SBC Macquarie bought last November.)
This is equivalent to an earnings multiple of around 18 times earnings (based on 2006 net profit). But that includes the earnings from Nine in Adelaide, since sold to WIN.
Ten's regional affiliates would not have earned as much as disclosed in the SBC report of $63 million on an earnings before interest and tax basis for its TV division.
The 18 times earnings multiple should be a bit higher, probably close to 20 times with the Nine Adelaide contribution stripped out.
As well as an affiliate, Macquarie has limited scope to making money: it is charged fees by Ten for its product and that would be around 25 to 30 per cent of revenue.
Macquarie can make money by combining the TV and radio sales forces and cross-selling, but that's a hard slog.
But the market's reaction to the Fairfax involvement looks unfair.
What investors are really saying is that this deal puts Fairfax even further away from the takeover list everyone has had it on.
No more share price of over $5 with Kerry Stokes and Rupert Murdoch playing in the share register.
At least Fairfax has someone in CEO David Kirk, and a board that can do deals (and see Rupert Murdoch and Kerry Stokes off the register).
Fairfax is moving into areas previously rejected under the regime of Fred Hilmer, who is now seen as an obstacle to change.
Hilmer refused to do deals in radio, TV (with the Ten Network), the internet (Seek, controlling carsales.com.au) and several other areas. Some of these would have helped Fairfax protect and grow its classified and display advertising revenues.
The one telling deal Hilmer did was buying half the New Zealand newspaper market, which should have convinced him of the worth of making deals in key areas of the media.
Now his replacement, David Kirk, has shown what can be done: the Albury Border Mail has been bought for $150 million (and papers in Wagga Wagga) and Rural Press has been acquired for around $2.8 billion.The company's online presence has been expanded both in terms of news (Brisbanetime.com.au) and companies (control of Mooter Media) and now the radio and TV production assets of Southern Cross Holdings.
And there was also the $620 million buy of the Trade Me website in NZ.
But the question for the market is also whether Fairfax can manage these non-newspaper assets.
It couldn't when it controlled the Macquarie Radio network back in the 1970s and 1980s (just as it couldn't understand Channels Seven in Sydney or Nine in Brisbane, which it owned before blundering Warwick Fairfax's privatisation crippled the company).
Fairfax at the moment can't control Fairfax Business Media, which publishes the Australian Financial Review, BRW and other magazines. Its moves into the online world have failed (afr.com is the latest digital dog from FBM).
So how will it be able to control and drive a very different business model like AM talk radio, which Fairfax's broadsheets and other papers have criticised (John Laws and 2UE, Neil Mitchell at 3AW in Melbourne)?
Fairfax will be able to use 2UE and 3AW to promote the SMH and the Age and their Sunday and community papers in both cities.
In Brisbane the news website Brisbane times.com.au and 4BC will be able to combine to gang up on the News Ltd monopoly in the Courier Mail; while in Perth, the planned Westerntimes.com.au and 6PR should be able to combine to attack the position of the monopoly paper, the West Australian, which is effectively controlled by Kerry Stokes Seven network Group with just over 15 per cent of WAN's shares.
Some of the comment today about Fairfax taking over Southern Star mentioned content and the amount Southern Star owns.
It does, but it's the content of others. Southern Star produces programs for others in most cases, or sells them overseas, such as Home and Away with the Seven Network. Southern Star takes a fee, Seven owns all the content rights.
If Fairfax wants content, it is going to have to pay Seven, Nine, Ten or other broadcasters' money: there will be no freebies, or it will have to invent its own TV formats, or risk money on new programming.
Fairfax will have to deal with Seven, Nine and Ten in getting the required clearances while Macquarie will have to sign agreements with Ten and Seven over the regional TV businesses.