With NZME listing on the stock market at the end of June, it made its brand available to investors. In doing so, it has pitted itself against not only local but international media companies. So, would NZME be a worthwhile investment?
By all estimates of a traditional media company, NZME remains an appealing proposition. As the Forsyth Barr investment summary in June explained: “There is value in the company’s talk of strong free cash flow, solid radio business, a possible merger with Fairfax NZ, its strong domestic brands and audiences and delivery of local content.”
The ability of NZME to create compelling content across channels and command a massive audience is unquestionable. However, how we understand the phrase ‘media company’ has evolved and this means that NZME is competing in a very different environment than it was before.
No longer limited to organisations that churn out content to attract audiences, today’s most successful media companies often don’t create very much at all. If Google and Facebook have shown us anything its that you just need to find a way to keep people coming back for more—and producing vast amounts of content is only one way of doing that.
The international tech juggernauts are perhaps not the best basis of comparison, but locally the likes of Realestate.co.nz and Metservice have also shown an uncanny ability to encourage a high rate of return visitors without having to produce much of their own content. And what’s more is that both these companies are starting to monetise their audiences by selling ad inventory.
In fact, the document lodged to the Commerce Commission outlining reasons why the merger between Fairfax and NZME should be permitted listed Metservice as one of the top ten competitors for ad spend in the current market.
What this means is that for NZME to look like an attractive investment it needs to show its worth—and potential for longevity—not only against what we understand as traditional media companies but also against newcomers.
When first listed, NZME shares were priced at $1, which was solely related to NZX system requirement. Shares initially traded at around 85 cents, and the latest share price has since dropped to $0.700 (at the time of publishing). However, as is always the case in the share market, the price will be determined by demand and this will largely depend on how worthwhile investors think the stock is.
What should people be thinking about when investing in a media company?
Talking about investing in a media company in general, New Zealand Shareholders Association chairman John Hawkins says it should have "sufficient critical mass and a variety of revenue streams". He says that is one of the background reasons why NZME and Fairfax are looking to merge their operations.
“What they are trying to do is put together a large enough company that the various aspects of it can operate successfully because they have sufficient critical mass and they can share a lot of overhead and so on.”
Hawkins says it doesn’t matter what the nature of the company is, media or not, the basic underlying principles remain the same.
People should be looking at who’s running the company because that will determine as much as anything where the company goes. He adds people should look at what the future prospects of the company are and what its history has been to date. He also says completely new startups are a higher risk because “most don’t succeed well all that often”.
However, some, like Facebook, have proven to be an “inspired choice” and those who invested at an early stage, as well as those who did so later on, have done well out of it.
When talking about media companies specifically, Hawkins says the future prospects are particularly important “because some media avenues are tending to become become a bit of a sunset industry” and people need to be careful they aren’t buying into a “dinosaur”.
“They’re at the end of their life as we know it. Examples there would be the standard print media in the way of newspapers perhaps, quite a lot of magazines are in the same category, a lot of these things are having to change the way in which they deliver their services.”
He says people should be buying into a company in which the changes have not only been recognised, it has either completed or begun to reposition the company to meet the challenges to be able to maintain a viable business.
Hawkins gives the example of the decision by Sky TV to search out a strategic partner to assist in the delivery of its content. He says it was “strongly supported by shareholders because it’s pretty obvious in a number of cases, and probably in the case of Sky, that the present model is not going to be viable as we go into the future”.
It’s not completely broken and it’s not completely past its use-by date yet, he says, but the prospects are seen as “not great”. Earlier this year, Sky’s interim results from the six months to December 2015 were released and showed an overall revenue increase of $475.6 million compared to $464.5 million from 2014. However, it reported a net profit of $87.3 million, dropping from $92.5 million in December 2014.
Vodafone will become a 51 percent shareholder in the company, combining its delivery services, mobile and internet, with Sky’s content.
Fund manager Lance Wiggs says, in general, he would only invest in a media company that is breaking the existing approaches to media distribution.
He says the news companies that are doing well are those that own a niche, like a business or trade sector, that is valuable and money can be made by charging for access.
Looking at broadcast media, he says companies are “under attack by players like Netflix, which have a systematic structural advantage, and are burdened with high legacy coasts”.
Wiggs also says there is a space for profitable business in local news and “here we are still unsure of the end game”.
American business magnate, investor and philanthropist Warren Buffett, owns a significant amount of stock in a variety of media companies through his company Berkshire Hathaway including print media. In the 2012 letter to the shareholders he explained: “Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what’s going on in your town… there is no substitute for a local newspaper that is doing its job.”
According to Investopedia, Buffet understands media is “far from dead” and that even in a declining market there will always be a company that is outperforming the competition. As well as print media, his investments include Twenty-First Century Fox, National Geographic Channel.
Legacy isn’t bad
In an age when we’re obsessed with newness, longstanding media companies are sometimes disadvantaged by their legacies. Investors are often drawn to the new tech-oriented companies and end up pouring millions into them. And while there are a few success stories, there are also a fair share of terrible investment stories in the tech and new media space.
The valuation of the companies rests on the assumption that the rapidly growing number of users can, sometime soon, be leveraged to lure in a massive amount of revenue. However, a lot of the companies thought to be winners fall off the table.
Hawkins says investors should be careful when investing in things that become the “flavour of the month”. He says they should look at things dispassionately and not get swept along in the tide of enthusiasm.
One of the most high profile examples of this would be Twitter. According to Money Morning, the stock performance “looks like the Titanic on its way to the bottom” due to its reporting of more than one billion people trying an abandoning it, leaving it with barely 300 million users in March. Its competitor Facebook had, at the time, more than 1.65 billion users.
Its stock price fell nearly 70 percent between February 2015 and February 2016.
In this context, the legacies of organisation like NZME, Sky and Vodafone remain a very powerful tool. While the new tech flavour of the month might cease to exist tomorrow, traditional media companies have carved out their longevitiy in the fiercely competitve media environment. And while it might not look as good as a pot of gold at the end of the tech rainbow, durability also counts when it comes to making investment decisions.