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Why Fairfax Media Limited is the subject of takeover speculation

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Credit: umbrella

Multiple news sources are reporting that Fairfax Media Limited (ASX: FXJ) could be a takeover target for U.S. private equity group TPG Capital. According to Fairfax itself the powerful private equity and venture capital operator is interested in Fairfax in part due to TPG’s past success in growing online property listings businesses.

The digital past has not been kind to Fairfax and its main hope to prosper in the digital future is its fast-growing online property listings business domain.com. Currently Fairfax shares trade for 88 cents which means the market ascribes the business a value around $2 billion, with nearly all of this valuation reflecting Domain’s long-term cash-generating potential.

This despite the fact that domain.com delivered just 42% of group EBITDA in FY 2016, with the key rider being that Domain’s revenues are growing strongly, while revenues across the traditional media businesses look to be in a long-term bear market.

In response management has resorted to savage cost cutting to support earnings, but the problem for Fairfax’s management is that by underinvesting in its publishing businesses it may lose the funnel through which it filters traffic to its domain.com website.

Unfortunately, any private equity buyer of Fairfax would likely have even more radical cost-cutting or divestment plans that would make staff even unhappier about the decline in working conditions and ongoing redundancies across the group.

Still, Domain has growth potential given it’s yet to achieve the geographic reach across the national property market of rival operators and Fairfax has been investing in extending its footprint deeper into the Brisbane and wider Queensland markets for example.

However, it shocked the market at the start of November when it warned the residential property listings slump would see Domain’s H1 2017 EBITDA come in lower than the prior corresponding half. Others like Sydeny-focused estate agent McGrath Ltd (ASX: MEA) have also recently warned of the property listings slump across east coast markets.

Should you buy?

There’s no doubt that Domain looks a great asset and Fairfax stock is potentially cheap if you take the view that it’s publishing and broadcasting operations can remain sustainably profitable into the digital future.

Personally, I think it’s a stock to watch from the sidelines given the uncertainty and as there are better opportunities if you’re looking to profit from the rise of online advertising.

Today Carsales.com Ltd (ASX: CAR) delivered a solid half-year profit result, while an even better option may be the founder-led jobs portal SEEK Limited (ASX: SEK). It would be my preferred option given it’s the real deal in terms of global expansion with multiple growth levers to pull in the giant online jobs sectors.

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Motley Fool contributor Tom Richardson owns shares in SEEK Limited. 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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