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HONG KONG (Reuters Breakingviews) - A buyout bid for Fairfax Media might need an edit. On Monday, the publisher of the Australian Financial Review and the Sydney Morning Herald said it received a takeover proposal from the U.S. buyout firm TPG and a Canadian pension fund, who want to buy and break up the media house in a A$2.9 billion ($2.1 billion) deal. The headline value is decent - but a fiddly mix of cash and stock makes for difficult reading.
TPG and the Ontario Teachers' Pension Plan want to pay A$0.95 a share in cash to get hold of Domain, the property portal that is now the most valuable bit of Fairfax, and which the parent was preparing to list. They would also take full ownership of Fairfax's major newspaper titles, its events business, and a start-up investing arm.
Under the proposal, existing shareholders would also retain shares in a remaining stub of less attractive businesses. This includes rural and regional newspapers in Australia; a Kiwi publisher; and stakes in Sydney-listed Macquarie Media, and in Stan, a video-streaming company. The buyers value this unit, which would house titles such as the Illawarra Mercury and Farm Weekly, at between A$0.25 and A$0.30 a share.
For long-suffering stockholders, an all-in price of up to A$1.25 a share will be enticing. That is a decent uplift on analysts' average price targets, of A$0.98 a share, and equates to about 20 times forecast earnings for the next financial year, Eikon data suggests. The business has traded at roughly 12 times forward earnings over the last five years.
The target's board is wary, however, highlighting the deal's complexity. Fairfax's directors will also need to satisfy themselves that the suitors are paying full value for Domain. In February, Morgan Stanley analysts argued a "bull case" could be made for valuing Domain at up to A$1.11 a share, if it were to trade on the same valuation as larger rival REA Group.
An all-cash offer would be easier to swallow, and beat getting paid partly in shares in the challenged businesses – but that would hinge on the buyers finding someone upfront who wanted to take the remainder off their hands. For TPG to prevail, it might have to put up with a bit of a deal rewrite.
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