Will a Domain Group IPO see Fairfax Media Limited sink or soar?

The plans for Domain.com could make or break Fairfax Media Limited (ASX:FXJ).

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Shares in Fairfax Media Limited (ASX: FXJ) have been suspended from trade until February 23 or until the media giant makes an announcement about its intended plans for its online property portal Domain.com.

The Fairfax press itself is reporting that the executive management team at the company are planning on selling about 30% of its ownership interest in Domain in a move that would see it spun off into a separate ASX-entity with Fairfax retaining control over the remaining 70%.

Fairfax's executive management team are probably having their ears chewed off by the fee-hungry advisers at its reported confidant Macquarie Group Ltd (ASX: MQG) to move to realise some value from the Domain business.

Selling off ownership in your only star growth asset while other businesses are going backwards may not seem a bright idea, but there may be some worth in raising funds to reinvest back into Domain and other growth ventures. In letting the market value the Domain business it may also realise some additional value.

The success of realestate.com.au is also a textbook example of how a fully spun off entity can prosper once it's free to focus 100% on growth as a separate entity. After News Corp (ASX: NWS) management decided to let REA Group Limited (ASX: REA) run free as a separate entity it has returned more than 1,000% to investors since 2008.

Back in November Fairfax's management warned that Domain's H1 2017 EBITDA would be marginally down on the prior corresponding period due to weaker property listings in the Sydney and Melbourne markets.

Still Domain has been growing EBITDA at strong rates over the past few years and management buoyed by its advisers may feel now is the right time to sell some of its interest in the business at a relatively high multiple of EBITDA that may (or may not) allow them to maximise value.

If you consider that REA Group currently trades on 18.2x annualised H1 2017 EBITDA of around $200 million then it's possible to imagine the book-builders at Macquarie would seek a similarly demanding multiple for Domain. Although I doubt they could achieve that kind of multiple given the high return on equity of REA Group and its outstanding track record.

The other consideration is what kind of multiple of NPAT the remaining Fairfax media business could command once it has sold a large chunk of its interest in its only growth asset. I expect a single-digit one if management sells off too much of the family jewels.

Big decisions ahead

If Fairfax were genuinely bullish on the long-term prospects of Domain I would have thought it would make sense to wait another 3-5 years before cashing in on any of it, unless the executive management team has some concrete plans for other growth areas to invest where it could achieve a higher return on invested capital.

It will be interesting to see whether the management team at Fairfax has or has not identified concrete opportunities as to where it can reinvest any capital raised, as this is important to a famous business facing a fight to secure its place in the digital future.

Motley Fool contributor Tom Richardson owns shares of Macquarie Group Limited. You can find Tom on Twitter @tommyr345 The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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