NZME Ltd [NZX:NZM] announced to the market this morning that it has written to the government, seeking legal authorisation to acquire Stuff, the other major media outlet in New Zealand.
NZME is the largest media owner in New Zealand, with properties such as The New Zealand Herald and The Radio Network. It currently has a market capitalisation of $42 million, and the current share price is $0.24.
The company released a trading update last month, citing revenues to be 50% lower in April — compared to the same time last year. A raft of cost-cutting and cash-preservation measures were being introduced:
- Workforce restructuring, reducing 200 positions (15% of workforce).
- Temporarily suspending some products and ceasing Radio Sport.
- Applied for and received the government wage subsidy.
- Reduced directors’ fees and CEO salary by 20%.
- All staff to work on a reduced-salary basis for a 12-week period.
In March, the business traded as low as $0.18 per share.
Why has the [NZX:NZM] share price risen?
NZME had previously sought the Commerce Commission’s approval to merge with Stuff. At the time, the application was knocked back.
Things now seem to have reached a head. Bauer Media and their magazines are gone. The ‘Fourth Estate’ as an arbiter of democracy is under threat. Locally, due to the financial pressures on the business model. And, globally, as huge sites like Google and Facebook come to dominate news aggregation.
The company advised as follows:
‘NZME believes that the New Zealand media sector is too small for the current number of quality participants and consolidation is urgent in the face of dramatically declining advertising revenue and current general economic conditions.’
Where could [NZX:NZM] go from here?
NZME seeks to buy Stuff for $1, in consideration for trading assets and liabilities.
The owner of Stuff, Australia’s Nine Entertainment [ASX: NEC], seems to have indicated this is a surprise. They recently terminated talks with NZME, so there appears to be some confusion here.
NZME has noted, ‘NZME’s view is that it is still in a binding exclusive negotiation period with Nine and does not accept that exclusivity has been validly terminated.’
Nonetheless, there was a strong willingness between the two parties do something before. And the business case remains even more pertinent today. Last week, Stuff Online appeared to be seeking donations on its website, which hints at financial woes.
The starting question now is whether the government will agree to allow any merger. Deputy Prime Minister Winston Peters had previously indicated some support for an NZME-Stuff combination. Broadcasting and Commerce Minister Kris Faafoi has made no comment so far.
Some investors seem bullish. On 30 April, Auscap Asset Management increased their stake in NZME from around 17.65% to 19.25% of the business.
Clearly, if NZME is able to take on Stuff, it will strengthen its business moat and value.
Yet, the value of media assets in this environment is under pressure. And it seems clear that left to the market alone, the business case of NZME will continue to weaken.
Shareholders have had a difficult run with this business. First, the loss of dividends. Then came rapid erosion of capital value.
Like Air New Zealand [NZX:AIR], one significant upside is the enduring and strategic value this company has to offer the nation.
The NZME share price surely shows value. But any investment now is pure speculation. Will the government support this business after locking down most of the economy? Or will they leave it to the inevitable harshness of market forces?
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