Craigs Investment Partners broker Chris Timms said Fairfax had been downgraded to sell because of faster falling revenue, moving to uncertain digital revenue streams, a cost-save programme being offset by reinvestment in the digital platform, the execution risk associated with a new strategy and the slowdown on debt reduction.
The share price had been downgraded to A40c (NZ50c) and was last traded at A46c. In mid-2007, Fairfax was trading just below $A5 ($NZ6.31) but fell to a low earlier this month of A41c.
The key risk to the latest valuation was corporate activity involving the major shareholder or another corporate entity and a recovery in advertising markets, he said.
Given the fall in the group's share price and the deteriorating earnings outlook, Craigs believed a break-up sale of the Fairfax group could be considered as a strategic option to crystallise value either by current management or an external party seeking to acquire the group.
A key consideration would be the implications of the break-up of the metro business which might be prohibitive, given the cost base and the links with the rest of the group's publishing and online operations in Australia, Mr Timms said.
Craigs had assigned a nil value to the metro print publishing division to reflect the deteriorating earnings profile due to the highly competitive conditions under which the metropolitan and community newspapers operated.
Also, the metro business had a high cost base relative to revenue and a weak structural industry position. Craigs had assumed $A200 million of restructuring and other costs, including large-scale redundancies.
Mr Timms said that in the current environment, finding buyers for all or some of the assets might be difficult, particularly the more structurally challenged parts of the business, such as the metropolitan newspapers.
Other issues included the inability to separate businesses and content and other services provided to group businesses as well as tax treatment and other legal implications.
In the case of New Zealand publishing, Craigs had valued the business at a 15% discount to the going concern value of $A273 million. In New Zealand, Fairfax titles include The Dominion Post, The Press and The Southland Times.
"We believe it would be hard to identify interested parties given the adverse structural impact and weak New Zealand macroeconomic environment," Mr Timms said.
The Australian Financial Review and communities newspapers had been valued at $A80 million and $A40 million respectively based on estimated realisable values for those assets.
Printing had been valued at $175 million, reflecting the costs of reallocating the printing operations to the operating divisions.
Fairfax Digital had been valued at an estimated realisable value of $A400 million, reflecting the three parts to the online platforms.
Fairfax's interest in Trade Me was valued at $A522 million, a 10% discount to the target share price of $NZ3.78. That reflected the potential discount that buyers might seek given the high multiple implied by the public valuation of Trade Me, he said.
Fairfax held 64% of Trade Me after selling some of the company to generate cash and reduce debts.
In its 2012 financial results, released last month, Fairfax highlighted that challenging economic conditions remained in its core advertising markets and the ongoing structural shift continued to affect the metro publishing division.
Management expected difficult trading conditions to continue.
"The relentless decline in group revenue is alarming to us and raises serious concerns about the long-term sustainability of the group's revenue base," Mr Timms said.
