The warm pre-holiday glow driven by rises in its and Fairfax’s share prices may have been fractured by APN’s profit warning, but there’s still reason to be optimistic about the Australian industry: It would be better still if the two would sit down to merger talks (writes Peter Coleman).

One official reason for growth in Fairfax – which rose more than 11 per cent to 54 cents – is a revised Commonwealth Bank Equities valuation which moved it from 43 to 59 cents. Media analyst Alice Bennett was quoted attributing the revaluation to a reassessment of margins on the publisher’s Domain print real estate classifieds. APN’s problems are attributed to a slowdown in the mining industry and the Newman government cutting its Queensland ad spend.

So what’s changed to bring this realisation that the ‘rivers of gold’ haven’t dried up completely? We don’t know, but despite changing times wrought by internet competition it’s hard not to see both Fairfax and APN as sound businesses turning over generally steady revenue.

That’s something Brian McCarthy knows about, having driven the rationalisation at Fairfax Media in the years following its Rural Press merger. Now his costcutting skills are at work at APN, where he has a free ranging advisory brief.

His boss, chief executive Brett Chenowith yesterday denied the company was in merger talks “at any level” with Fairfax. Perhaps it should be.

Talk around the industry for a while has tipped this week as the one for a major announcement from Fairfax Media but the official line is that it isn’t going to happen.

Both companies have seen dramatic write-offs in a disastrous year, and have been punished with some of the lowest share valuations in the history. Until yesterday’s Commbank review, print had been ‘on the nose’ with institutional investors – so much so that negative values had effectively been placed on Fairfax’s flagship metro titles – but the fact remains that both companies own valuable, profitable businesses.

Big city publishing has its problems throughout the world, frequently because publishers spent revenue from classified advertising in worthy but virtually unrelated segments of the business which they can no longer afford to sustain.

That those ‘rivers of gold’ mostly dried up as a result of competition from the internet is a matter of history – although some ‘classified’ has actually morphed to a different form in features and supplements. There have of course been successive valuations – leading to the industry’s drastic ‘correction’ this year – and this week’s minor revaluation. The fact remains that a couple of Australia’s print media assets are vulnerable to a canny predator.

In the USA, new entrepreneurs have entered the industry to take advantage of its woes against a context of easier foreign ownership, and Murdoch himself is seen as in the market for distressed media properties.

In the UK, former KGB spy Alexander Lebedev famously picked up the London Evening Standard for a trifle and is now reported to be looking for investors in the turned-around business. Even Malaysian billionaire Ananda Krishnan, whose PanOcean Management became the biggest shareholder in struggling UK regional publisher Johnston Press, has been among many looking for undervalued media assets in the country.

As an alternative to becoming prey to a local or overseas buyer – we’re not sure Gina Rinehart and have our doubts about Kerry Stokes – a Fairfax and APN merger has a lot to commend it, something Fairfax chief executive Greg Hywood has indirectly acknowledged.

And yes, most of the regional geography works well: The old Rural Press business was a neat fit with APN on Australia’s east coast, and this remains the case since the 2007 merger. Apart from its Brisbane suburbans – to which the Beaudesert Times has just been added – Fairfax’s regional publishing businesses are dotted up the coast to Port Macquarie; APN’s start 100 kilometres up the road at Coffs Harbour and continue to Mackay. Overlaps such as that which existed when Rural owned the Gympie Times and its interests in Noosa – awkwardly between APN’s Maroochydore and Maryborough/Bundaberg papers – have long ago been resolved in the interests of cutting the costs of competition.

The comfortable relationship has been recognised for a couple of years through a pact on classified advertising which sees cooperative deals for advertisers, and Fairfax branding – such as the Domain property name – on APN websites and supplements.

Not that rivals don’t crop up: Former APN Mackay general manager Darren McVean started a cluster of mining town titles this year with the launch of the Mackay Telegraph and a sister edition in Toowoomba; and in Noosa, staff from the defunct Journal are having a go with a new weekly title. But this is the nature of a business in which start-ups are usually sold to their much-larger neighbours, something Lindsay Bock had done a couple of times before selling the Noosa Journal to News Limited.

The real competitor is News itself, which owns the prime real estate in Brisbane, the Gold Coast, Townsville and Cairns, and is frequently the independents’ printer… a position which affords it first knowledge if cash flow is getting tight.

In New Zealand – where APN has put its South Island newspapers and some other titles up for sale – there is a logical fit. Regulators are likely to suggest an acquisition is anti-competitive… but given that overall, a Fairfax offer is likely to be the best on the table, it is likely the obstacles could be overcome with a few token divestments.

It’s in New Zealand too, that costly problems remain to be resolved with outdated and uncompetitive printing equipment. Fairfax put a substantial new press into Christchurch – similar to the one it has in Ormiston, Brisbane – and is poised to install presses from the metro plants it will close in Tullamarine (Melbourne) and Chullora (Sydney) into a new greenfield site in Auckland.

McCarthy will already have gone over the sums: With a merger you’d need only one Auckland plant to print both APN’s New Zealand Herald and Fairfax’s titles, and there is the potential for other similar savings in that country and Australia.

Outside the major cities, both publishers know they need to increase colour capacity and deliver economies of scale. These are savings which have so far been frustrated by New Zealand’s fjordlike topograhy, but which will be both forced and enabled by falling circulations and reduced emphasis on breaking the latest news in print.

Facing similar problems, Fairfax and APN have appeared to be taking different approaches, the former saying it had ruled out dismantling the group as a means of accessing value for shareholders, while the latter put its NZ South Island assets on the market.

Speaking at an investment conference in Sydney in October, Hywood said Fairfax was “always looking for opportunities to expand” and refused to rule out a merger with other media companies. And he declined to talk specifically about a potential merger with a company such as APN.

The person who could make it happen is tipped to be Simon Marais, whose Allan Gray has substantial shareholding in both companies and wants Fairfax to look at merger options.

And while Hywood is most quoted on Fairfax’s transition to digital publishing, it is clear that he hasn’t given up on print: The company even bought a print newspaper – complete with plant – in southeast Queensland’s Beaudesert/Jimboomba growth area at the end of August.

In the October address, he talked of expanding the footprint of its regional and metro businesses, both of which are focussed around Victoria and New South Wales.

A deal with APN could rectify that, and place it in a more competitive position in Brisbane, close to APN’s most profitable publishing centres, but where it owns a digital-only news website and a big printing press, and only a few suburban and agricultural newspapers.