APN's lovely little monopolies
- Company: APN News & Media (APN)
- Recommendation: Long Term Buy
- Price at Review: $3.86
- Current Price: $0.375
- Fundamental risk: 3
- Share price risk: 3.5
This media company owns lots of regional monopolies and its management team puts Fairfax to shame. In fact, for shareholders' sake, we'd love to see APN buy it.At The Intelligent Investor, we have more than a passing interest in monopolies. Without interference from tricky competitors, and so long as the creeping tentacles of regulation haven't got them by the throat, these franchises can get on with the relentless business of making money. That's why many big companies like to buy up smaller ones. It has little to do with 'synergies' and far more to do with eliminating a potentially difficult competitor and being able to charge customers more as a result. It's shareholder and CEO nirvana, as the big four banks so ably demonstrate.
To APN News & Media, a collection of small monopolies. The original business, Australian Provincial Newspapers, owns regional newspapers throughout Northern NSW and Queensland. Including the recently purchased New Zealand regionals, the company now owns 24 daily newspapers and over 90 non-dailies, most of which have been in circulation for more than 80 years. The Bundaberg News-Mail is a good example. It was first published in 1925 after the merger of the Bundaberg Mail (est. 1876) and the Daily News (est. 1907). In 1938 its only competition folded and the News-Mail has happily plodded along as the only paper in town ever since. The Morning Bulletin in Rockhampton has a similar history. It was originally established in 1861 and is the second-oldest business in the city after the Criterion Hotel, another fine establishment. These newspapers enjoy a monopoly position because the towns in which they are based aren't big enough to support more than one paper. Whenever a second paper starts up, one invariably goes bust, usually after not too much of an interval. That's why a prospective competitor needs deep pockets to take on an incumbent. Most do not even try, which is why APN is such a profitable business.
Of course, the company has evolved: it now operates a radio division and outdoor advertising companies. In radio, APN has a joint venture with US radio company Clear Channel Communications in the form of the Australian Radio Network (ARN). With 12 metropolitan radio stations in Australia and 94 licences in New Zealand, it's the largest in Australasia. Stations range from Mix FM for the youngsters to the classic hits format, of which WSFM in Sydney is an example. ARN has also teamed with DMG to operate the Brisbane Mix stations in Brisbane and Perth. The company is also the largest operator in outdoor advertising, with the Cody, Buspak, Adshel and Australian Posters brands. These are the signs and posters you see in shopping centres, airports and bus shelters. It's another monopoly business tactic—operate lots of different companies owned by one big company to give the appearance of competition.
But what really transformed APN was the acquisition, for $809m, of Wilson & Horton (W&H) in October 2001. W&H was owned by the O'Reilly family, now the largest shareholders in APN with 43.7%, and contained a number of media assets, the largest of which was The New Zealand Herald, the largest newspaper in New Zealand. It was a great purchase—this one title contributed about 38% of operating profit for the whole company in the 12 months to December 2003.
With the history lesson complete, let's now make a comparison to explain why we're continuing to recommend this stock. Fairfax purchased Independent Newspapers from News Corp in April 2003 for $1.1bn. This business is forecasting an operating profit of $130m in 2004, a return of 11.8% on the original investment. By comparison, APN's New Zealand acquisition recorded a profit of $134m for the 2003 year, a return of 16.6%. We don't think either company got a bargain but APN got a better business at a cheaper price, another example of why we prefer its management over Fairfax.
APN's shares are down 4% since Feb 04 (Long Term Buy—$3.89) but are up 5% since our last full review in Jun 03 (Long Term Buy—$3.55) although, as the larger proportion of profits is now coming from New Zealand, the dividend is no longer fully-franked. In fact, the final dividend of 11.8 cents was only franked to 30% (ex-date 5 Apr). On the adjusted 2003 earnings per share of 24 cents, the company is trading on a PER of 16. Compare this to Fairfax, with its PER of 20, and WA News, on 21—both of which we consider inferior to APN, and you can see why we're happy to stick with LONG TERM BUY.
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