Graham Mott’s take on the current MRN-Fairfax stand-off.
 
John Singleton’s rant on 2GB this morning about the failed merger of the Macquarie Radio Network (MRN) and the Fairfax Radio Network (FRN) typifies the problem of getting the deal done.
 
Singo was responding to a highly “questionable” article in the Fairfax press.  Amongst other things the story stated: “Fairfax Media’s $200 million radio merger talks with John Singleton’s Macquarie Radio Network have collapsed after it became clear that star Macquarie presenters Alan Jones and Ray Hadley were not prepared to be part of the proposed deal.” For full audio, see our earlier report.
 
You have to wonder about what purpose the article served other than for Fairfax to say: It wasn’t our fault.  And, you also have to wonder about Singo’s rant.  It was all over the place and even though Alan Jones tried to bring his boss back to the point – whatever that was – Singo just kept rambling.  At least Singo did make one point: It wasn’t our fault.
 
It’s obvious that MRN and FRN are comfortable with blaming each other.  This is an absurd situation, particularly when they need each other so much.  Unless a new investor comes out of the blue MRN and FRN are stuck in a situation that provides no real growth whatsoever.  MRN’s revenue is down and so too is FRN’s.
 
Both parties know they can gain significant synergies via a merger or acquisition.  If they become one, by whatever means, it will also provide revenue opportunities to grow via a stronger network that incudes market leaders 2GB and 3AW.
 
Having public spats and playing the blame game doesn’t get the deal done.  You have to wonder what the shareholders must think.  Then, of course, there’s the staff of both operations.  What must they be thinking of their bosses and of the future?  It doesn’t do a lot for confidence.
 
It’s no surprise to see that both MRN and FRN are losing market share of revenue and audience.  Ongoing spats do nothing for the image of both operations in the business community and the listeners for the most part don’t understand and are not interested. 
Let’s face it, they tune into Alan Jones to hear Alan, not to have his boss ramble on for 20 minutes.  Who knows what the Financial Review readers think?  Surely the smart ones don’t really think that two on-air presenters could stop a multi-million dollar deal from succeeding.
 
So boys, time to put the egos on the shelf and find a way to do the deal.  If you don’t, you’re both in deep doo-doo.
 
Graham Mott was General Manager of Fairfax Radio from 2007 until his retirement in 2012. Prior to that he was 13 years with the previous owners of the network, Southern Cross. An inductee into the Radio Hall of Fame, Mr Mott has been deeply involved in the various take-over and merger bids between Fairfax, MRN and others over the past decade. 
 
 

What would happen if Macquarie and Fairfax merge? See Bob Peters’ financial analysis here.

BACKGROUND
 
MRN and FRN have been trying to get together for many years.  It goes back as far as the days when Southern Cross Broadcasting (SCB) owned the group of stations now known as FRN.  Merger talks commenced in mid-2003.  The proposal was to combine a significant part of the station operations of 2UE and 2GB including, but not limited to:
 
National Agency sales;
News;
Technical; and
Administration.
 
The merger was designed to benefit both owners, SCB and MRN, with considerable savings in operating expenses and an improved share of National Agency revenue.
 
The merger was almost complete when a leaked article appeared on the front page of The Australian on 3 December 2003.  As a result of the leak the SCB board decided to kill off the planned merger.  Tony Bell, chief executive and managing director of 2UE’s parent company, SCB, said that while he felt the plan was financially sound, he decided to withdraw from the deal as a result of the details being prematurely leaked.
 
In November 2007 Fairfax Media acquired the SCB radio stations – 2UE Sydney, 3AW & Magic 1278 Melbourne, 4BC & 4BH Brisbane and 6PR & 96fm Perth.
 
Further discussions took place in 2008 and again in 2010 regarding a merger between FRN and MRN.  In May 2011 Fairfax announced that it had decided to consider selling its radio assets as a result of interest that had been shown by the market.  MRN stated publicly its strong desire to acquire the stations.
 
THE HISTORY OF 2UE AND 2GB
 
2UE and 2GB have been fierce competitors since their inception.  Both have a history in Top 40 music and big name personalities.  Their formats were a mixture of music and talk; however when talkback commenced in 1968 the Talk component changed dramatically.  Listeners were able to gain immediate access to their favourite station and personalities.  It was from this point that the component of opinion became an integral part of the Talk format appeal.
 
In the late 60’s and through the 70’s all stations were financially successful.  With only six commercial stations in each of the Sydney and Melbourne markets, and even less in the other cap cities, making a dollar wasn’t all that hard.  It’s fair to say that you could make a profit even if you were an ordinary operator.  However, things began to change in the late 70’s.  In Sydney and Melbourne new AM licenses were introduced in 1978 – 2WS Sydney and 3MP Melbourne – and commercial FM broadcasts commenced in 1980.
 
The era of greed in the 80’s gave way to financial control and responsibility by the end of the decade.  This all happened at a time when Australia’s inflation rate was at an all-time high and we went on to endure the “recession we had to have” according Treasurer Paul Keating.  It was in this environment that the Sydney Talk stations were hit hard by the reality that it was very difficult, if not impossible, for the two of them to remain profitable.
 
The success of commercial Talk in Sydney came down to who had the big name personalities – or more to the point – who had John Laws.  Laws value to the business grew significantly, along with his salary, as he moved between 2GB and 2UE (he was at 2UW for a short time).  Laws showed he could move an audience and advertisers with immediate effect and it didn’t take long for him to be dubbed the King, and the King was the formula for success.
 
As the years rolled by the King’s crown started to slip – cash for comment didn’t help – and a new driver of success, Alan Jones, was making waves.  Jones once described himself during his sensational run of success at 2UE as: The Bank.  He most certainly was and if ever anyone doubted that they quickly learned he was the man who could change the fortunes of a station overnight.  When Jones left 2UE at the end of 2001 and started on 2GB breakfast in early 2002 it impacted the two radio stations instantly.  Jones was the key driver; however he didn’t do it alone.  Ray Hadley performed brilliantly and soon became the No.1 morning radio personality.  Unfortunately for Southern Cross and Fairfax it has been a one-sided match over the past eleven years.
 
WHY A MERGER
 
2UE is bleeding the Fairfax Radio Network and the company needs to stop the rot.  In the last two years 2UE’s audience has dropped 30%, which has killed off their chance of growing revenue.  With no recovery in sight for 2UE Fairfax needs an out – they can’t keep operating the way they are.
 
A merger will benefit 2UE and 2GB with significant reductions in operating expenses for both stations.  Added to that will be the opportunity to increase National Agency revenue across the entire network by having key stations 2GB and 3AW in the same sales offering.
 
The downside of a merger is the complexity of establishing and managing it.  There are other options, one of which is for Fairfax to cut its losses and sell 2UE.  It could then form an affiliation with MRN to become part of the Talk sales and news network.  This structure currently exists with Fairfax Radio and their Adelaide affiliate 5AA.
 
This is simple and has no concerns regarding the regulators, the ACCC and ACMA.  It also allows for an easy exit for both parties.  The winner of this scenario would be Fairfax who would rid itself of a significant loss making business and at the same time they would enjoy a much improved sales offering with 2GB and 3AW in the same network.
 
However, from an MRN point of view this structure doesn’t have much appeal apart from the potential of increased National Agency sales.  With no windfall of a significant reduction in operating expenses MRN’s EBIT growth expectations would be moderate.
 
There’s no doubt that Fairfax hold the upper hand in any scenario.  They have the capacity to borrow if they decided to acquire MRN.  Fairfax could then divest 2CH and reap the benefits of a combined 2GB/2UE operation or they could sell 2UE and retain 2CH.  The retention of 2CH would complete an east coast adult music network with the Fairfax owned Magic 1278 and 4BH.
 
If Fairfax considers itself a long-term operator of radio assets acquiring MRN now is likely to be a more value additive than acquiring MRN’s share of a merger at a future point after synergies and benefits have been realised.
MRN’s options are fewer due to their limited borrowing capacity.  For them, the most benefits would come from a merger.
 
In the event that a merger was the favoured option the task of establishing and operating it would be complex.  It would require a clearly defined business plan that would also have to overcome potential issues with bodies such as the ACCC and ACMA.  Depending on just how the merger is structured, one of the stations in Sydney might need to be divested.
 
Another matter that will need to be determined is a clear understanding between Fairfax and MRN as to whether one or both of them will want to exit the venture and when.
 
The issue of the day to day management in Sydney will be very challenging, but nonetheless, an exciting one.