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What you need to know about Fairfax Media Limited’s Domain spin-off

Following recent shareholder and Federal Court approval, Fairfax Media Limited (ASX: FXJ) will spin off its online real estate business, Domain.

Domain Holdings Australia Pty Ltd (ASX: DHA) will list on 16 November and Fairfax will retain 60% ownership with eligible shareholders the remaining 40%. They will receive one Domain share for every 10 Fairfax shares held. No new capital will be raised under the proposed scheme.

Since launching its domain.com.au site in 1999, Domain has grown to become the number two operator in online real estate classifieds in Australia. The business also provides commercial property marketing services and social media and print offerings.

Most recently, the company has diversified into other real estate-related businesses including home loan brokering, utilities product comparison and connection services. It also has an interest in an online home improvement and local trades marketplace.

In FY2017 Domain generated $320 million in revenue from operations; including $218 million from Core Digital and $88 million from the Print business segment.

Core Digital revenues have grown at a compound annual growth rate of 19% since FY2015, and on 21 September, Fairfax provided a business update stating digital revenue growth had been 22% so far in FY2018.

While Print revenues have grown at a rate of 13% since FY2015, there is downward pressure on print advertising revenues given the increasing trend for consumers to search for real estate online. Digital is also a more profitable business model for Domain, contributing 82% of FY2017 pro forma EBITDA.

Also included in the business update was a statement that costs in FY2018 were expected to increase by 10% on a like-for-like basis. Higher expenses in FY2017 caused pro forma EBIT to fall to $86 million, from $96 million in FY2016. Despite the recent decline in profitability, EBIT has still increased at a compound annual growth rate of 10% since FY2015.

There will be additional costs for Domain in FY2018 as a result of listing and becoming a standalone entity. However, I believe there will also be greater efficiencies and scope for cost-cutting to come as management can focus more on the Digital business.

Foolish takeaway

I have previously written about the positive investment opportunities that spin-offs can present, and Domain is set to be one of the most anticipated ASX listings of late. Separating the two businesses makes sense, and I believe Domain will become stronger for it.

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Motley Fool contributor Ian Crane does not own shares in any company mentioned. 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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