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Why the Fairfax Media Limited share price could plunge

Fairfax Media

Fairfax Media Limited (ASX: FXJ) today announced that takeover talks for the company have ended, which could see the share price sink on the ASX today. Shares resume trading at 11:00am.

Two proposals – one from funds affiliated with Hellman & Friedman LLC, and the second a consortium including private equity firm TPG Capital never went beyond making a binding offer for Fairfax.

Fairfax says that after granting both parties due diligence, it has now ceased discussions. Despite the bids, Fairfax is still pursuing its plan of separating Domain through a demerger, where Fairfax would still own 60-70% of Domain. Fairfax shareholders are expected to receive shares in Domain once the separation had been implemented.

That still appears to be a good plan, given the difference in businesses and should allow the market to establish a direct valuation for Domain. Given competitor REA Group Ltd (ASX: REA) has a market cap of $8.75 billion, one would think that Domain could be worth at least half that. The whole of Fairfax has a market cap of $2.5 billion currently.

Fairfax CEO Greg Hywood says that progress should see the demerger completed by the end of 2017.

Investors considering a bet on Fairfax and Domain could consider stepping in if the share price crumbles today. One factor to take into consideration is the outlook for the non-Domain businesses – i.e. the remains of Fairfax, the metro, New Zealand and regional publishing and radio stakes.

Fairfax also has 50% of streaming video on demand (SVOD) service STAN, in partnership with Nine Entertainment Co Holdings Ltd (ASX: NEC). Subscriber numbers appear to be growing, despite competition from large SVOD service provider Netflix.

Foolish takeaway

A falling Fairfax Media share price could be the perfect opportunity for Foolish investors to jump in to grab a stake in the Domain business. There are other alternatives though for those investors not so keen on Fairfax – like the ones below.

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Motley Fool contributor Mike King has no position in any stocks mentioned. You can follow Mike on Twitter @TMFKinga

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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