Independent poised to merge APN with Wilson & Horton

Independent News & Media's plan to merge its Wilson & Horton newspaper and radio business in New Zealand with its 41 per cent-owned Australian media group APN was announced late last night. Trading in APN shares was suspended on the Australian Stock Exchange yesterday, pending the announcement.

The takeover will almost double the size of APN and position the group to mount a feasible takeover bid for Fairfax, Australia's largest publisher of daily national newspapers.

Such a move by APN would, however, require changes to Australia's media cross-ownership and foreign ownership regulations, although the outgoing Liberal government has hinted that it favours easing these restrictions.

APN and its advisers - stockbrokers JB Were and bankers JP Morgan and CSFB - are currently making presentations to APN's main institutional shareholders to secure their support for the takeover.

The key institutional shareholders are Perpetual Investments, Westpac, Colonial First State, AMP and the Queensland Investment Corporation.

While some shareholders have privately expressed misgivings about the takeover, analysts believe the offer price for Wilson & Horton of 1.23 billion Australian dollars (€690 million) - or slightly less than 10 times earnings before interest, tax and depreciation - is reasonable, without being excessive.

It is understood that APN will raise approximately Aus$700 million to part-fund the acquisition, with the balance coming from borrowings.

APN said last night that Aus$250 million will be raised through convertible loan notes, approximately Aus$500 million will be raised through an issue of new APN shares.

As owner of Wilson & Horton, Independent will take part of the sale price in APN shares - enough to take its stake in APN from 40 per cent to 45 per cent. At the end of the complex financial engineering, it is estimated that Independent will realise more than €220 million in cash that will reduce its heavy debt load. At the end of its half-year in June, Independent had net debt of €1.5 billion (£1.18 billion).

While the APN-Wilson & Horton merger is a major move by any standards, analysts believe that it is only the first step for a bid for Fairfax. Independent chairman Sir Anthony O'Reilly has always voiced his admiration for Fairfax and its major national titles, which include the Australian Financial Review and the Sydney Morning Herald, and never hid his disappointment at losing out to a consortium headed by Mr Conrad Black when Fairfax was the subject of a bitter takeover battle 10 years ago.

Now, since Australian entrepreneur Mr Kerry Packer sold his 14.9 per cent of the group, Fairfax is seen as vulnerable to a takeover bid. The increased scale of APN after a merger with Wilson & Horton - with a likely market capitalisation of Aus$1.5 billion - means it could more confidently table a bid for Fairfax even though that group, with a market capitalisation of Aus$3.5 billion, is still almost twice the size of the enlarged APN.

Whether APN even gets a chance to bid for Fairfax will depend on the easing of the current media ownership regulations.

In this regard, APN and Independent will fervently hope that Mr John Howard's outgoing Liberal administration will be returned to power in next month's election.

The Labour opposition has opposed any change in the regulations that would allow APN - effectively controlled by Independent - to bid for Fairfax and its national newspaper assets.