13

Musical Chairs

In the game of musical chairs, we are one of only two significant newspaper groups, compared with three television networks and numerous players in other media. This gives us a strong negotiating position. We will be one of the chairs, not a dancer left standing.

Fred Hilmer, October 2004

Mark Burrows stared down Fred Hilmer across the boardroom table. ‘Have we instructed you to go and try and sell the business to anybody?’ he said flatly.

The other directors were silent. Burrows was being aggressive. The atmosphere was uneasy. Hilmer was uncharacteristically defensive.

‘No, no, no’, Hilmer stammered, saying that it was all just a case of misreporting.

Burrows was unconvinced. So were the other directors.

Two days earlier, on 17 February 2004, the story had broken on Channel 9’s evening news. Telstra’s chairman, Bob Mansfield, and its chief executive, Ziggy Switkowski, had proposed to their board that the company take a controlling interest in Fairfax. The plan was to sell Telstra’s directories business, Sensis, into Fairfax in return for shares that would deliver at least 30 per cent, and perhaps as much as 50 per cent, of the newspaper company to Telstra. Sensis was valued at around $7 billion and Fairfax at $3.5 billion, more if a premium was included. This was no back-of-the-envelope idea.

Mansfield had already run the proposal past Prime Minister John Howard, who’d said it was a matter for the Telstra board—he wouldn’t interfere. It was politician-speak for ‘go ahead’. Telstra was still 51 per cent owned by the government. If the deal had gone through, the country’s quality media effectively would have been controlled by a majority government-owned company—and in an election year. It was preposterous.

The fallout at Telstra in the wake of the Channel 9 report was devastating. A director had leaked the details of a board meeting on a very sensitive issue—no matter that the Telstra board had thrown out the proposal. And what’s more, they had leaked them to the Packer organisation, which used the story to lead the six o’clock TV news and put it on the cover of The Bulletin the next day. It was orchestrated for maximum embarrassment.

Sam Chisholm, a one-time key executive of both the Packer and Murdoch organisations and then chairman of Foxtel (which was owned by Packer, Murdoch and Telstra), was on the Telstra board. He led the fight against the Fairfax proposal and was widely fingered in the press as the leak, although he denied it. Business columnist and former Age editor Alan Kohler wrote in the SMH and The Age: ‘Who was the leaker? Well, if Al Capone were chairman, Sam Chisholm would be lying in a pool of blood already. He’s a friend of the reporter who broke the story, a known opponent of the chief executive and well connected with Telstra’s enemies’.

The acrimony between Chisholm and Switkowski was well known. Chisholm has an acerbic sense of humour. There was a joke doing the rounds in media circles at the time that the Telstra chief executive’s real name was John Smith but he’d changed it to Ziggy Switkowski to make him sound smarter. The gag was widely attributed to Chisholm. Boardrooms might be full of grown-ups rather than 10-year-old boys, but they can be a lot nastier than any school playground.

Mansfield lost his chairman’s job, one of the most prestigious jobs in the country, over the Fairfax debacle. It must have been doubly galling for Mansfield—he had been sacked at Fairfax as chief executive eight years earlier. Switkowski lasted until the end of that year, but then he too announced his resignation.

Hilmer, however, survived the controversy, which probably said more about the Fairfax board than it did about its chief executive. While Telstra was telling reporters that there had been discussions between Switkowski and Hilmer, the Fairfax chief executive was claiming ignorance—not just to the board but to anyone who would listen.

Hilmer told Brett Clegg of the Fin Review that the two companies had explored ideas but that ‘in this case there was no proposal, no work had been done on it by us’. Then he added: ‘Is it an idea worth studying? Of course it is’. Meanwhile, Fairfax chairman Dean Wills told reporters after the hostile Fairfax board meeting that the two companies had often discussed a range of projects but that the talks were always informal. ‘They have never gone far enough to come up as a Fairfax board issue; there’s been nothing concrete’, he said. In other words, the board had been left in the dark.

At least two of the serving directors at that time are still angry about the Telstra deal nearly a decade later, describing it as one of those defining corporate moments—one that revealed a weak board and served as a worrying indicator of the strength of the Westfield clique, particularly Hilmer and Wills. Gonski was credited in The Bulletin article with having brought the Fairfax deal to Telstra in the first place, but he denied it.

Brett Clegg’s interview with Hilmer included an interesting anecdote: ‘At least once every day, Fred Hilmer takes time out to stare at a single piece of paper. In the centre, he has Fairfax. Dotted around the newspaper publisher are rival media players, the companies and their assets, that Hilmer would like to acquire, in order of priority’. In retrospect, it appears to sum up Hilmer’s last three years at Fairfax. He was on the road to expansion—if Fairfax was to survive, it needed to get bigger. Hilmer was desperate to do a deal.

The departure of Brian Powers as chairman and his replacement by Dean Wills strengthened Hilmer’s hand at Fairfax. Wills and Hilmer were joined at the hip, thanks to their long corporate history, and backing them both was fellow board director David Gonski. It was a powerful triumvirate. But generally it was not a great time to be on the Fairfax board. Wills, at the end of his career, was not a strong chairman, and this frustrated several of the board members. And Hilmer’s relationship with the board, outside the Westfield clique, was poor.

Hilmer’s intellectual arrogance meant that he found it difficult to engage with people who he thought were not up to speed, were not as bright as he was, were amateurs at corporate strategy. ‘Fred treated the board with derision’, says one director. One reason he could do so was that he had the economy onside. It was turning up. Advertising revenues were booming again. And he was in charge of the ship. When he’d arrived at Fairfax, 40 per cent of the share register was in the hands of two players—BIL and Packer’s FXF Trust. Powers and Hilmer had managed to extricate Fairfax from the rather embarrassing position of having BIL, essentially a bunch of imploding entrepreneurs, as the key shareholder. Fairfax bought back 10 per cent of its shares from BIL and arranged for the remaining 14 per cent to be placed with institutions. As for the Packer interests, FXF Trust had sold out its 15 per cent interest to a range of institutions in July 2001. By November 2002, Powers had gone as well. Hilmer finally felt in control, particularly as he had the strong backing of his chairman. Now he could put his own strategy in play.

His first move came early in Wills’ chairmanship—the purchase of Murdoch’s New Zealand newspaper assets, Independent News Ltd, in April 2003. This is the deal Hilmer is most proud of from his time at Fairfax. It delivered two metropolitan newspapers, The Dominion Post in Wellington and The Press in Christchurch, plus two national Sunday newspapers, seven regional papers, fifty-three community publications, thirteen magazines and the Gordon & Gotch distribution network. Burrows did the early negotiations with Murdoch on the New Zealand deal on behalf of the Fairfax board. The New Zealand economy was on the upturn at that stage as well and the assets were particularly profitable in the first two years. The downside? This was the old technology. At the same time as Hilmer was buying big in New Zealand, Packer’s PBL was snapping up 33 per cent of Seek.

John B Fairfax’s Rural Press group was also in Hilmer’s sights, for at least two years. But he couldn’t get past first base. Hilmer and John B are very different personalities. If it is possible to be both humble and patrician at the same time, then that just about sums up John B. There is also a steely determination there. But he found Hilmer perplexing. At the early meetings, Hilmer and Wills’ price proposals were just ridiculous, way too low. And John B didn’t welcome the advances—he wasn’t ready to sell. But then Hilmer came back with a price high enough that John B, in his role as chairman, would be obliged to put it to the board. At the very next meeting, however, John B got the impression that Hilmer believed the price was still negotiable. John B had had enough—he wouldn’t deal with him anymore. Hilmer had made it clear that he wouldn’t pay a premium for control and John B concluded that he was simply trying to pick up Rural Press cheaply. His assessment of Hilmer was that he wasn’t a tough businessman, more of a tough academic. John B wasn’t impressed.

Then, in early 2004, came the Telstra debacle. But that didn’t put Hilmer off. He was still looking for deals. The difference was that now he had a prickly relationship with some members of the board. In March 2004, it brought on another clash with Burrows.

This time, Hilmer wanted to buy The Trading Post, a newspaper that relied solely on classified ads. He was up against Telstra in a bidding war and was prepared to pay $600 million or more. Burrows thought it was madness. The price was highly inflated. Telstra won out in the end, paying $636 million, which was a lucky miss for Fairfax. Within five years, Telstra had ceased to produce The Trading Post altogether. In 2013, it was trying to license the title to carsales.com.au for virtual peanuts and was being assessed by the competition regulator. The Trading Post had been a dog, an old-fashioned product that didn’t translate well enough online to beat the start-up competitors.

He may have been defeated on The Trading Post, but Hilmer kept at it. Within two months, he had another deal for the board, this time for the purchase of West Australian Newspapers. WAN had a stranglehold on the print media in the west with Perth’s daily, The West Australian, and twenty-four regional newspapers throughout the state. Its only competition was a Murdoch-run Sunday newspaper—The West Australian didn’t publish on Sunday. During the week, because the Sydney and Melbourne papers arrived later in the day, the only papers that could be tossed across the fence by Perth’s newsagents were The West Australian and The Australian. If Fairfax could get hold of WAN, it would increase its national footprint and boost its bottom line—WAN was very profitable, thanks to classified ads.

There were several sticking points in the negotiations, however. Hilmer, once again, didn’t want to pay a premium for company control—price was still an issue. And this was essentially a merger so management and board positions would have to be rationalised. It was a handy way to get rid of some board members. WAN wanted its chief executive, Ian Law, to have a key role in the merged group. But the real deal killer, at least on the Fairfax side, was the opposition that came from Burrows. Burrows lobbied furiously against the merger. He repeatedly questioned the numbers that Hilmer put forward on cost savings. He argued against the synergies that Hilmer claimed and pointed out that it would be a red flag to Murdoch. Murdoch would go feral, he told the Fairfax board. Murdoch, at the stroke of a pen, might come in and turn his Sunday newspaper in Western Australia into a direct competitor—just to stuff up Fairfax.

Once again, Hilmer failed. Some on the board were now questioning whether they wanted Hilmer to remain at Fairfax. Factions developed. Burrows, Ron Walker and Margaret Jackson were keen for Hilmer to move on. The chief executive wanted more time, and there was only one way to get it.

Every year, the Fin Review hosted a golf day for key advertisers and selected business contacts. The board and senior management often came along to fly the Fairfax flag. But in 2004, Wills and Hilmer didn’t hang around too long at the after-golf drinks. They had work to do. Later that day, the two men sat down and drafted a press release together. The announcement was that Fred Hilmer had decided to step down as Fairfax’s chief executive—not now, but on some unspecified date in 2005. It was a done deal. Burrows, Walker and Jackson were livid—Hilmer could be around for another eighteen months. He had bypassed them by cooking up a new deal with Dean Wills. They would also soon realise that Hilmer wasn’t finished with his deal making.

John Howard and his Liberal–National Party Coalition came up for re-election in October 2004. Howard had been stymied on his planned media changes ever since he had first come to power in March 1996. But the mood was changing, both within his own party and the electorate. At the 2004 federal election, Howard came up against a Labor Party led by the volatile Mark Latham, and he romped home. Not only did he win a clear majority in the House of Representatives but he gained control of the Senate as well. He could put through any legislation he wanted to without having to negotiate with the minority parties or independent senators. Changes to the media laws were now all but certain, though the prime minister made it clear that his first priority was the full privatisation of Telstra. Nonetheless, media stocks skyrocketed in the week after Howard’s re-election.

Hilmer and Wills sensed that it was time for another deal—a merger with Channel 10. Once the cross-media and foreign-ownership restrictions were dropped, Fairfax would be able to buy a television network. So why not get in early?

Canwest, owned by Canadian media mogul Izzy Asper, had a 56 per cent economic stake in Channel 10 but only 14.9 per cent of the voting rights. It was a complicated ownership structure that included convertible and subordinated debentures—Canwest was foreign. But, importantly, the structure had been approved by the ABA. Canwest was not permitted to control Channel 10 but, according to the ABA, it could own more than half of it under this highly structured model. Canwest had been contemplating cashing in the Ten Network stake for some time, but the Asper family wanted a good price for it.

Hilmer and Wills were reasonably confident that Fairfax could buy into Channel 10 with the same structure as Canwest. And Hilmer thought he could get the board onside this time. So the negotiations began within a month of Howard’s election win. Nick Falloon was the executive chairman of Channel 10 at the time and the main player in the early talks with Hilmer and Wills. Falloon knew that Canwest wanted an exit strategy and the Fairfax deal seemed to be a perfect solution. Meanwhile, Izzy Asper had passed over the corporate reins to his son, Leonard, and he would negotiate for Canwest.

In late 2004, Falloon made a rare trip to Canwest’s headquarters in Winnipeg in the Canadian province of Manitoba. Under the ABA-approved deal between Canwest and Channel 10, Canwest could not be seen to have control of the management or the board. Falloon had been scrupulous about being seen to be independent and had previously avoided going to Canada. But this time he made an exception. When he arrived, Falloon laid out the scenario for Leonard Asper—Howard had won control of the Senate, the media rules might or might not be changed, there was no guarantee that the cross-media and foreign-ownership restrictions would be dropped, but it was a fair punt. Falloon suggested that Asper move now. The Australian Government was unlikely to do anything to stop him because the structure had already been approved. Most importantly, when the foreign-ownership rules likely did change, Canwest’s investment would be both more valuable and more liquid. When the company decided to cash in, it could do so easily and more profitably.

The plan was that Fairfax would take over Channel 10 in a share swap. Canwest would emerge with 30 per cent of the enlarged Fairfax and Nick Falloon would be chief executive, running both the newspapers and the television network. Leonard Asper loved the idea but not the price. He wanted a control premium. Hilmer, however, had made it clear that he wasn’t budging on that point. True to form, he’d again refused to pay a premium for control—a price higher than the prevailing price on the stock exchange to account for the fact that the shareholding was large enough to deliver control of the company. It was a stumbling block for Canwest.

And there was another potential hiccup. Falloon had had several meetings with Wills and Hilmer to try to resolve the issue. It had become clear during the discussions that Hilmer was trying to keep any hint of the negotiations secret from Mark Burrows. He feared Burrows’ Murdoch connection. The deal was getting close to being done. If News Limited got wind of it, it could go feral and head to Canberra to blow it up. This gives an indication of the level of paranoia on the Fairfax board at that time.

Asper had three options. Do nothing. Do the Fairfax transaction. Or sell his shares in Channel 10 to another buyer. He chose option number one, to do nothing. Hilmer wouldn’t offer a premium on the price to acknowledge control, so Asper was going to sit this one out. Falloon was so disappointed by Asper’s stance that, when he returned from his meeting in Canada, he sold all his shares in the Ten Network.

News of the Channel 10 negotiations broke in Australian newspapers in January 2005. But it was pretty much all over by then. Besides, there was a new story doing the rounds. The Fairfax board had decided on a successor to Hilmer. The international search for a new chief executive at Fairfax had turned up Doug Flynn, head of the giant Aegis media buying group in London and a former managing director of Murdoch’s News International in the United Kingdom. Flynn, an Australian who had been working in London for ten years, was ready to come home. As his son was in the last two years of school, he would have to repeat one year to fit back in with the Australian school year cycle, so Flynn was keen to take the job and be settled in Australia by January 2005—his son could then start in his new school at the beginning of a school year.

But two things unsettled Flynn. The first was that the news of his candidature had been leaked to the Fin Review within a day of him being approached for the position. This was unprofessional. He was the head of a public company and he had an obligation to shareholders—the leak was hugely embarrassing. Then the negotiations over small details of his remuneration package dragged on and on. Flynn had a teenager to settle into school, the timing was important, so what on earth was Hilmer up to? In the end, Flynn just pulled out. Whether the job offer was sabotaged within Fairfax will never be known. What is known is that Hilmer was still in the chair.

Hilmer tried to make light of his long goodbye to the media and the shareholders. At a presentation to analysts in February 2005 on the Fairfax profit results for the December half-year, Hilmer opened proceedings with a lame joke: ‘I’ve been searching for a line, like, “Who would have thought it, but here I am again”’. Hilmer was seated in front of a banner promoting Fairfax’s MyCareer website, prompting him to comment: ‘If I was looking for a job, that’s where I’d go’. (The background was actually meant to be a Fairfax corporate banner, but someone had brought the wrong sign.)

During the presentation, Hilmer also brushed aside questions about the hunt for a new chief executive. It was ‘moving on well’, he said, adding: ‘There is no sense of crisis or panic’ among board members conducting the search. But this wasn’t how a growing number of directors viewed the situation. Hilmer’s days were running out. David Gonski had announced his intention to step down from the Fairfax board sometime in 2005, citing the pressure of other commitments. Margaret Jackson had left the board the previous July, incensed that Hilmer had wangled an extension of his tenure through his side deal with Wills. Wills himself was likely to vacate the chair at the November annual general meeting. His three-year term was up and he wasn’t getting any younger.

Hilmer’s time was clearly coming to an end. But there was one more deal that he and Wills hadn’t yet tried—a link-up with the Packers.

In May 2005, Wills had lunch with Kerry Packer in the corporate dining room of PBL’s Park Street headquarters in Sydney. Kerry wasn’t well. He was only sixty-seven but his body was giving out on him. (Within six months, he would be dead.) His son James and a coterie of close executives, including John Alexander and Ashok Jacob, were really running the show. Perhaps Kerry was just being polite to Wills or maybe he did still harbour an ambition finally to take control of Fairfax. Various scenarios were discussed. Fairfax could buy the Nine Network in a share swap and the Packers would end up with 30 per cent of Fairfax and effective control. Investment bankers were asked to run their slide rules over the numbers. David Gonski received a call. But it was very perfunctory.

Rupert Murdoch heard about the lunch and was privately scathing about the possibility of a Packer–Fairfax tie-up. Then, in early July, the Murdoch press broke the story. Tensions in the media sector were running high at this point. Change was imminent. Howard was still mulling over changes to the media laws. Helen Coonan, the federal communications minister, was conferring with all the leading players. But there was a sense of frustration. What if Murdoch bought out Channel Seven? Packer’s PBL would face a mighty competitor, one vertically integrated across the advertising platforms. Packer would have to take over Fairfax to be a viable opponent. And what if Packer and Murdoch decided to get together like they had for pay TV? The Nine Network and Murdoch’s Australian media assets could merge. Or Murdoch could buy 15 per cent of Nine. The permutations seemed endless.

It was quickly becoming clear, however, that Hilmer’s optimism about doing a standout deal was misplaced. In the current corporate game of musical chairs, Fairfax might well be the last company left standing. Murdoch and Packer’s PBL were welcoming a new era. They were embracing the internet in a way that Fairfax had proved itself incapable of doing. Internationally, Murdoch was making big bets. News Corporation paid US$724 million in July 2005 to buy into the social media site MySpace. And, right from under Fairfax’s nose, Packer and Murdoch had snared the biggest players in online classifieds.

The bottom line was that Hilmer had come into Fairfax in 1998 when the company had a monopoly of the print classifieds for jobs, cars and houses. It had been well placed to transfer that monopoly online. But by the latter stages of 2005, Fairfax had lost the online classifieds battle, defeated by Packer and Murdoch.

Hilmer walked out of Fairfax in October 2005 with a $4.3 million payout. He had already chosen his successor, David Kirk, then chief executive of printing company PMP. Dean Wills, Hilmer’s great supporter, had stepped down from the chair two months earlier to be replaced by deputy chairman Ron Walker. All that was left was Hilmer’s farewell. And even that was a fizzer.

As Alan Kennedy wrote in a nostalgic piece on Hoopla.com in 2012:

I remember the night Hilmer left with a $4 million bonus in his kick. I remember because we all feasted on high-quality sushi and sashimi that was going cheap in the canteen. It was to have been part of the food served at a lavish, bang-up beano down on the executive floor, but this was called off after some of us let it be known we might turn up to give Freddo our own special farewell. What amused us as we ate our sushi was that two minutes after we’d made our threat, we promptly forgot about it, but management didn’t.