Inside the Fairfax-Nine merger deal

Fairfax and Nine to merge

When Fairfax Media chairman Nick Falloon was spotted at legendary television executive Sam Chisholm’s funeral last week, some old sparring partners thought he looked a little sheepish. 

And it turns out he had 2.1 billion reasons to be.

Falloon was days away from signing the biggest Australian media M&A deal in more than five years, and one that could have big implications for plenty of the media crowd that had gathered to say goodbye to Chisholm.

He was almost at the end of an intense fortnight. A fortnight that saw him and his executive team grilled by their opposites at Nine, and grill them back in return, in an attempt to create a new $4.2 billion media company capable of challenging the likes of Facebook and Google

The talks were sparked a fortnight earlier, when former Treasurer and now Nine chairman Peter Costello delivered the phone call that Falloon and his board wanted to receive. 

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And this time, Costello knew what to say.

Project Wolfgang, believed to be named after Nine general counsel Rachel Launders’ pet dog Mozart, was a finely tuned bid for Fairfax, publisher of AFR Weekend, in its entirety. 

Gone was Nine’s hope to buy Fairfax’s $40 million-a-year radio business and its half share of streaming company Stan, and in its place was a $2.1 billion scrip-heavy bid for the whole lot. And he was willing to pay for control, including the chairman and CEO’s seats. 

It was timed to perfection. Nine shares were at a record high, driven by a six-month period where metropolitan TV advertising had outpaced digital media for the first time in a decade and did not need the support of Nine’s unpredictable shareholder, Bruce Gordon.  

It was also the whole-of-company bid Fairfax had been waiting for, from the company it knew was its most logical merger partner. In little more than a year, Fairfax had been down the private equity path, held talks with Nine and its rival, Seven West, and others, and spun off its most valued asset, Domain.

But it wasn’t until Wolfgang landed that the board knew that it had met its match.

From the time Costello called, both sides agreed the news needed to be tightly held. Any leak would likely see Nine’s shares tank, Fairfax’s jump, draw comment from the Prime Minister, and the deal would be over almost as soon as it started. 

Tightly held meant an extremely quick timetable – only two weeks for due diligence – and involving only a handful of executives from each side. All meetings would be held on neutral ground – a bunch of suits at Nine’s headquarters in Sydney’s Willoughby or Fairfax’s home in Pyrmont would all but guarantee the deal leaked. 

So the venue had to be one of their advisers’ offices. Nine had on hand former Credit Suisse and UBS banker Michael Stock, who now runs US bank Jefferies in Australia. Stock’s office in Sydney’s Governor Phillip Tower was quickly ruled out as being too close to the prying eyes of rival investment banks Goldman Sachs and Merrill Lynch.

It meant all face-to-face meetings were to be held at Macquarie Group’s new-ish headquarters, a classically restored heritage building with a swish, glassy office tower in Sydney’s Martin Place. Macquarie Capital’s Darren Keogh and Michael Milne were advising Fairfax on “Project Galactic”, and the building was out of the way enough from rivals and other deal makers to keep it confidential. 

Other advisers included law firm Ashurst’s Bruce Macdonald and Mark Stanbridge, advising Nine, and Fairfax’s lawyers at King & Wood Mallesons including Tim Bednall (M&A) and Shannon Henrick (competition). 

Those involved were told to come and go at different times, to be sure. 

Nine was offering mostly scrip, so the diligence was two-way.

It is understood Nine grilled Fairfax’s Falloon (also executive chairman of Domain), Greg Hywood (CEO), David Housego (CFO), Dhruv Gupta (strategy) and Gail Hambly (general counsel). 

Meanwhile, Fairfax wanted to hear from Nine’s Hugh Marks (CEO), Greg Barnes (CFO), Alexi Baker (strategy) and Michael Stephenson (chief sales officer). 

It was a quick program helped along by the fact both companies’ full-year financial results were just about ready.

And it was only made possible by the fact Falloon and Hywood and Costello and Marks had been keeping a close eye on each other. The two companies co-owned Stan, which meant Hywood and Marks always had a reason to catch up, as they did regularly. 

The two weeks’ diligence came and went and Nine, as it had been all along, was quick to firm up its offer. Falloon and Costello signed, albeit from different locations, and shocked Nine and Fairfax staff and shareholders with news of the merger on Thursday. 

The quick courtship means there is plenty of work to do on both sides of the merger. Nine shareholders are still waiting for more clarity around what the combined entity will look like and details of the supposed $50 million in synergies. 

The transaction is expected to live or die on Nine’s share price. Fairfax’s board got comfortable with Nine’s valuation as part of the due diligence program, and they will be hoping shareholders can do the same. 

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