While many investors shun media companies as an investment proposition, potentially imminent legislative reforms could spark a consolidation of the media sector and create a raft of investment opportunities.
Traditional media business models, particularly free-to-air television and publishing, have struggled in recent years as the internet has diverted eyeballs and advertising dollars to new online platforms, including social media and streaming services.
The ubiquitous international new media companies threaten to erode local advertising revenues further with figures out last month showing that Facebook and Google now earn 85 per cent of new online advertising revenue in the US.
Responding to the current media landscape, which has altered radically since media laws were last overhauled, the federal government is proposing a range of legislative measures aimed at levelling the playing field for local media players and bringing media laws into the 21st century.
Prime Minister Malcolm Turnbull has urged support for the reforms to allow media groups to “merge and support each other in very challenging times, where the real competition is not each other, it’s Google and Facebook.”
Confronting a common threat, Australian media companies are unanimous in their support for the government’s media reform agenda. The proposed laws include a broad array of provisions to reform the media industry, including restrictions on gambling advertising and the abolition of the current reach rule preventing a TV station broadcasting to greater than 75 per cent of the Australian population. Significantly, the two-out-of-three rule restricting ownership of a TV station, a newspaper and a radio station in the same market would also be repealed.
Already passed through the lower house, the reform package goes before the Senate when Parliament returns after the winter break on August 8. Labor remains steadfast in its opposition and has publicly stated it intends to block the amending legislation in its entirety.
Without Labor’s support, the proposed new media laws are contingent on the support of the cross-benchers, including the Greens, Pauline Hanson’s One Nation and the Nick Xenophon Team. Media reports have suggested that Pauline Hanson remains the key to resolving the deadlock.
At the time of writing, the government was continuing its efforts to garner support from these minor parties with negotiations ongoing. Communications Minister Mitch Fifield was recently quoted in the media saying: “Unlike Labor, all other groupings in the Senate have and continue to engage in constructive discussion.”
If the media laws come into effect, this could lead to a consolidation of the industry with media companies in the TV broadcast, publishing, radio and outdoor segments potentially in play. As the industry consolidates, various company mergers and acquisitions could give shareholders the opportunity to benefit from offers at a premium to the prevailing share price.
The abolition of the two-out-of-three ownership rule and the reach rule could lead to media companies acquiring assets they are currently prohibited from buying to supplement existing revenue streams and boost profitability. New laws would allow a range of possible asset combinations with the potential for radio, TV-stations and publishing businesses to be owned by a single entity.
In our view, radio and outdoor media businesses are the most attractive media assets as they have been more resilient to the headwinds buffeting the sector, achieving revenue growth despite the backdrop. They currently offer good value and are likely to be particularly prized by potential bidders.
Stocks that offer good value and would be well-positioned to benefit from proposed legislative reforms include: HT&E (formerly APN News & Media), owner of KiiS FM, and Southern Cross Media Group, which owns radio station Triple M.
Similarly, Fairfax Media, publisher of The Australian Financial Review, could benefit under the proposed new legislative regime. With some desirable assets, particularly its lucrative Domain business, as well as stakes in radio network Macquarie Media and streaming service Stan, we believe the company offers a strategic investment opportunity.
The proposed reforms could soon alter Australia’s media landscape dramatically. While the passage through Parliament appears somewhat circuitous, we think the reform package bill will ultimately pass through the Senate and be enacted as law in coming months.
With media companies facing structural and competitive challenges, valuations of many media businesses have fallen sharply and now offer considerable value. With most investors wary of the sector, media companies offer opportunities for the contrarian investor.
Chris Stott is chief investment officer of Wilson Asset Management. Entities managed by WAM own shares in HT&E, Southern Cross Media and Fairfax Media.