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Private equity firm TPG approaches Fairfax Media about $2.2 billion demerger

Private equity group TPG has approached Fairfax Media about a $2.2 billion demerger of its online property classifieds business and metropolitan mastheads in a bid that will attract political scrutiny and earn a cautious reception from the company's board.

With Australia's media industry expected to undergo a wave of consolidation after the Turnbull government announced a relaxation of ownership laws, TPG executive Joel Thickins met with Fairfax chairman Nick Falloon in Sydney on Friday to present the demerger proposal that could lead to the breakup of the 176-year-old publishing company.

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Sources familiar with discussions, which took place in Fairfax's boardroom, said TPG had offered to buy online real estate business Domain and the company's three major mastheads - The Sydney Morning Herald, The Age and The Australian Financial Review - for the equivalent of 95c per share in cash.  

The proposed deal would mean Fairfax's New Zealand publishing division, regional and community newspapers, radio unit and 50 per cent share of video streaming joint venture Stan would become a separately listed company.

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Fairfax directors including chief executive Greg Hywood met with adviser Macquarie on Sunday. It is understood the company will respond to TPG on Monday with a short public statement describing the proposal as complicated and uncertain. However, Fairfax sources said the board would not endorse or reject the deal because directors needed more time to consider the approach before making a formal recommendation. 

In an email to staff, Mr Hywood said: "Appropriately, the Fairfax board is reviewing the indicative proposal. There is no certainty that the indicative proposal will result in an offer for Fairfax, what the terms of any offer would be, or whether there will be a recommendation by the Fairfax board."

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TPG, which owns just less than 5 per cent of Fairfax, argues the proposal values the company at $1.25 per share, or $2.9 billion. Fairfax shares were trading near the $1.05 mark before news of TPG's stake became public in March and closed at $1.06 per share on Friday. Fairfax sources believe it makes more sense for TPG to bid for the entire company. 

The approach came as Communications Minister Mitch Fifield announced major changes to ownership regulations that will eliminate the "two out of three" and "reach" rules, which have long restricted mergers and acquisitions among Australian media companies. 

It also coincides with a week-long strike called by journalists at the SMH and Age over a $30 million editorial cost-cutting program that will result in the loss of 125 jobs.

Sources close to TPG, which is advised by investment bank Credit Suisse, said the timing of its approach was unrelated to events in Canberra.

A relaxation of ownership restrictions would allow companies to cherry pick Fairfax's remaining assets with Nine Entertainment expected to consider a bid for the 50 per cent of Stan it does not own and the radio division which owns 3AW in Melbourne and Sydney's 2GB.  

The possibility Fairfax's best assets could be owned by a Texas-based investor drew a strong response from some politicians.

"The work of private equity firms was epitomised in Barbarians at the Gate, let's hope we don't have barbarians at the editorial desk," said independent South Australian senator Nick Xenophon.

Mr Fifield's office was more circumspect.

"This is a matter for the Fairfax board and its shareholders," said a spokesman. 

"A proposal would also require scrutiny from the Foreign Investment Review Board and the government does not comment on prospective FIRB applications." 

Fairfax Media announced in February that it was looking into spinning off Domain into a separate listed vehicle to address perceptions that its value was underappreciated by the market. Last week, Mr Hywood told an investor conference that the Domain review was "well under way" and expected to be completed later this year.

Domain accounts for the bulk of Fairfax's market valuation and TPG is expected to ask the division's CEO, Antony Catalano, to run the new business if its proposal is successful.

Mr Catalano would not comment but colleagues said he was supportive of the TPG deal because he did not believe Mr Hywood's plan to "structurally separate" Domain from the metro mastheads "was the right thing to do".

Deutsche Bank analyst Entcho Raykovski values Domain at $2.2 billion. He calculates the remaining assets are worth about $710 million, with metropolitan print worth $17.6 million.

Domain relies on the large online audiences generated by The SMH and Age. Sources close to TPG say Mr Thickins told Mr Falloon he wants grow the mastheads to improve Domain's reach. Fairfax sources said that businesses such as Stan also depend on the audience and reach of the metro mastheads. 

Spokesmen for TPG and Fairfax declined to comment. 

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