Will the Government do for media what it did for the dairy industry in 2001 when it legislated over the head of the Commerce Commission to create Fonterra? Bernard Hickey explains why a merger of NZME and Stuff to create ‘Mediaterra’ in 2020 is very unlikely.
Journalists, executives, one politician and some shareholders hope the Labour-led Government will do for media sector what Helen Clark’s Government did for dairy farmers when it legislated to create Fonterra. But is it possible for history to rhyme in this way? I think not in this case.
This latest attempt to create a single and completely dominant newspaper and online news company is likely to stumble and fall again under the weight of competition law that saw it proven illegal (three times) and governmental inaction on that law in an election year. The Labour-New Zealand First coalition is unlikely to over-ride that law due to the political risks and commercial conflicts involved, along with a fast-moving and hostile media landscape that may cripple both companies anyway.
The latest attempt just before Christmas to combine our two largest news companies is turning this corporate situation into a long-running saga more akin to ‘The Walking Dead’ (in its 10th season with at least two more to go) than ‘War and Peace’.
The Commerce Commission, the High Court, the Court of Appeal, Fairfax Australia, Google and Facebook keep firing and stabbing and slashing, but the zombies just keep getting up and staggering forward. This Commerce Commission timeline shows the merger attempt started in May 2016 and has been through a Commission review, conference and decision process and two court processes that lasted more than two and a half years between 2016 and late 2018.
Then it was revived in November last year when NZME executives proposed a deal to cabinet ministers to combine the publishers of The NZ Herald, Stuff, the Dominion Post, the Press and 11 regional daily newspapers with a ‘Kiwi Share’ promising to keep separate newsrooms and websites.
A moment in time
The spectacle of those NZME bosses (Chair Peter Cullinane, CEO Michael Boggs and Managing Editor Shayne Currie) sitting in the front row of a Beehive Theatrette news conference next to New Zealand First MP Jenny Marcroft and egging on Deputy Prime Minister Winston Peters with his support for the idea was quite a thing.
But the trail has gone noticeably cold since then, particularly given any progress would effectively require a law change. The idea the Government could suggest to the Commerce Commission, albeit with a new chairperson, that the merger be waved through is out of the question given the strength of the verdicts in the previous three rulings by the Commission, the High Court and the Appeal Court.
The only legal way forward would be for some sort of arrangement similar to the Dairy Industry Restructuring Act (DIRA), which combined the ‘single desk’ and state-controlled New Zealand Dairy Board with two biggest dairy cooperatives at the time to create Fonterra in September 2001.
That process was relatively more straightforward than a NZME-Stuff merger. Then Prime Minister Helen Clark supported the industry-wide agreed plan in April 2001 and legislation went through a 13-week select committee process with the widespread support of NZ Inc in five months, but even then only after intense industry debate and years of discussion. It was also over a year before an election.
Fonterra was borne out of an industry with a century-long history of supplier-owned cooperatives working together with a single state-driven export arm in the national interest. The merger was never tested by the courts and all the industry players were local.
There’s no NZ Inc this time. The NZME-Stuff merger would clearly create a newspaper monopoly and utterly dominate the news landscape. The Commerce Commission compared the dominance to that of the Chinese Government over China’s media landscape.
Along with its own private fund manager shareholders, any StuffME is up against other media companies that are either owned by Australian and New Zealand fund managers, or are so global that they won’t cooperate. Another one, albeit obliquely in the advertising market is TVNZ, which is owned by the Government and under its own revenue pressures.
No cooperation this time
The bracing fact is that Google and Facebook paid less tax combined in the last decade than the journalists on just one of the regional newspapers owned by the two groups, let alone the groups themselves. They both regularly flout New Zealand laws on name suppression and copyright. This situation is nowhere near like the dairy industry of 2001. It would have been like asking Nestle and Danone to lay off while DIRA passed and Fonterra got its act together.
Don’t bet on a deal
Last year Nine proved reluctant to accept less than $100 million when it put the group up for sale and decided in the end not to sell it. Investment banking sources told me in late December there were several bids around the $50 million mark, but Nine wanted more than $100 million.
Nine would also have to accept shares in an NZX-listed company, rather than cash, which means itr is likely to want even more. The chances its Sydney-based executives will play ball with NZME on valuation are slim.
Years of working group hell
Then there’s the political problems.
Cabinet delayed a decision to start a merger of RNZ and TVNZ at its last meeting of the year in December because of a lack of agreement. Getting all of Cabinet, along with all three governing parties, to support a waiver and fresh legislation would be a stretch, certainly before the election in September. That would not leave enough time for a ‘Media Industry Restructuring Act’ to proceed this year.
Meanwhile, the financial positions of both companies are becoming more tenuous by the month. See a lot more here in my December 13 analysis on: Why this politician and two mega-mergers won’t save journalism
The real bottom line
Both firms have high fixed costs and fast-falling advertising revenues that are slicing into their bottom lines and free cash flow very quickly. In accounts published late last year their combined free cash flow from ongoing operations was in the low single digit tens of millions and falling at a rate of $10-20 million per year.
They could both need cash injections from shareholders (because banks are unlikely to lend much more) or emergency restructurings within the next year or two to survive. Both have stopped paying dividends to shareholders and would have over $100 million in debt if combined.
So what is most likely to happen?
Shareholders are likely to step in to stop any merger process while the politicians are dithering to save their own financial situations. That would involve cash injections, restructurings and newspaper closures. Their only hope is a ‘white knight’ private equity fund comes along to slam the two together and pay for it with cheap borrowed money. But that is a double edged sword. Just ask MediaWorks, which was bought by Ironbridge from the stock market and loaded up with debt just before the Global Financial Crisis. It has been in perma-receivership ever since and Three is still up for sale.
A final thought: aside from the financial, political, legal and competition challenges, there is an underlying democratic problem.
A merged StuffMe could easily be bought by News Corp, which bought a independent Queensland newspaper chain just last year. That would put climate change coverage in New Zealand in the hands of the Murdochs. That hasn’t worked out well for Australia.
This was the fifth in the ongoing series on Newsroom Pro of the 8 Big Questions for 2020.
5. Will NZME and Stuff merge?
6. Will New Zealand regulate Big Tech?
7. Will New Zealand conclude a trade deal with the EU and or UK?
8. Will the Government appoint an Auckland Light Rail builder?
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