Last updated: December 6, 2006 9:25 am

Fairfax to buy Rural Press for A$2.8bn

John Fairfax Holdings, the Australian publishing group, said Wednesday that it would acquire Rural Press in a A$2.8bn (US$2.3bn) cash-and-shares deal that marks the first significant takeover in the Australian media sector since the passage of a new media law.

The deal, which would be Fairfax’s largest acquisition, creates a group with a combined value of A$9bn, including about A$2.3bn of debt.

Australia’s parliament agreed this autumn to ease long-standing restrictions on foreign investment and cross-ownership in media.

The legislative overhaul, which is expected to come into force early next year, has already triggered several transactions involving leading private equity groups as well as some of the world’s biggest media moguls, including Rupert Murdoch, Sir Anthony O’Reilly and James Packer, Australia’s richest man.

Rural Press had a market cap of less than A$200m when it listed in 1989. Its portfolio of publications has since grown to about 170 newspapers and magazines. Most readers of its papers are in the countryside or small towns with the exception of subscribers to the Canberra Times. The company is considered one of Australia’s most efficient print operations, with group margins about 7 percentage points above those of Fairfax.

Still the merger was seen Wednesday as a defensive move by Fairfax against a possible takeover attempt. Fairfax has been touted as a likely target because, unlike many other media companies, it has a fragmented shareholder base with no single investor in a position to dictate the terms of a deal.

The speculation has helped lift its share price by about 30 per cent this year, which in turn enabled Fairfax to justify the premium offered to Rural Press shareholders. Fairfax is paying 14.7 times the estimated 2007 earnings of Rural Press. The share price of Rural Press soared 14 per cent to A$13.41 yesterday while Fairfax shares dropped 3.1 per cent to A$5.05.

The takeover came a day after Seven Network, the media group controlled by Kerry Stokes, joined Mr Murdoch’s News Corp. on the Fairfax shareholder register with a stake of less than 5 per cent. Mr Murdoch acquired what he called a “strategic’’ stake of 7.5 per cent in Fairfax in October.

A banker involved in Wednesday’s transaction said the purchase might deter medium-sized companies from targeting Fairfax, but was not “a poison pill’’ for the largest players in the sector.

In a research note, Macquarie Bank also noted the deal would only be completed in April, “leaving ample time for a spoiling shareholder or transaction.’’

Fairfax said it hoped to achieve annual cost savings of A$35m within 18 months of completing the transaction. The deal will be funded with as much as A$667m in cash and by issuing at least 405m new shares.

Lazard is advising Fairfax while ABN Amro worked for Rural Press.

The tie-up will also turn John Brehmer Fairfax, the chairman of Rural Press, into the largest shareholder in Fairfax, with as much as 16 per cent of the equity, marking the return of a family member into the namesake company that owns many of Australia’s leading newspapers, including the Sydney Morning Herald, The Age and The Australian Financial Review.

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