Fairfax giving birth to $1.8 billion baby in Domain

Fairfax is set to give birth to a digital property group, Domain, weighing in with net equity of $1.7 billion and an enterprise value of $1.85 billion.

The separation of the parent from its sizeable child will see Fairfax emerge with a 60 per cent stake in Domain worth around $1 billion. And while Domain will be taking on around $155 million in debt, Fairfax will emerge from the exercise with a reduced debt level.

Earlier this year private Equity firm TPG sniffed around Domain with numbers of around $2.2 billion being touted. But it and another private equity group ultimately baulked at proposals to buy the entire Fairfax Media group (including Domain) for more than $2.7 billion.

The Fairfax board, while opening its books to both, had long retained a preference for the Domain spin-off plan.

The other 40 per cent of Domain will be held by existing Fairfax shareholders who will each receive one Domain share for every 10 Fairfax shares.

Just where the Domain share prices starts trading when it becomes separately listed is unknown but given its earnings growth profile it will be valued on a higher multiple of earnings than its parent Fairfax.

A strong Domain share price value should translate into a firmer value for Fairfax as its major shareholder.

The Fairfax board needs Domain to trade strongly on a stand-alone basis to justify its separation strategy. This was certainly a large part of the rationale for the deal.

However, it will also mean that Fairfax will no longer have direct access to Domain's cash flow and will only receive money from Domain via dividends.

And while Domain will have its own separate management and board the reality is that autonomy will be crimped by the fact that Fairfax dominates the register.

The separation which has largely been greeted positively by analysts will allow shareholders to own either or both of Domain and Fairfax.

Domain's board will include three non-executive directors appointed by Fairfax.

One of these directors will be Fairfax group general counsel Gail Hambly and two will be current non-executive directors of Fairfax, including the chairman Nick Falloon who will also be chairman of Domain, and three non-executive directors - curiously one of which is Greg Ellis former head of Domain's major competitor, REA.

But separation comes at a price.

The incremental costs for Fairfax Media post separation are $5 million a year as opposed to $10million-$12 million for Domain.

Fairfax Media and Domain will enter into a number of commercial agreements for services that the parties will provide to each other post separation.

Some of those services might have been provided at no cost prior to the split.

The company estimates the incremental total cost to Domain will be in the order of $2 million initially rising to about $4 million over the next three years.

Independent expert Grant Samuel noted the impetus for the move stemmed from several sources, including a view within Fairfax, that its share price did not fully reflect the value of its businesses and the evolution of Domain.

It also would cater for differing "growth trajectories" for the two businesses.

While it also noted several disadvantages that evaluation was essentially subjective as the advantages and benefits were not quantifiable or verifiable.

"They are, at least to some extent, a matter of perception. None of the benefits are individually compelling but collectively are meaningful and likely to enhance shareholder value," it said.

This story Fairfax giving birth to $1.8 billion baby in Domain first appeared on The Sydney Morning Herald.