David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

David Bonderman knows how to strike when the iron is hot.

His TPG Group is making a roughly A$2.7 billion ($2 billion) offer for Australia's Fairfax Media Ltd. at a pivotal time. Journalists are on strike over plans to cut one in four editorial jobs at its most prestigious titles, while management is weighing a spinoff of the real estate website that generates all its earnings growth.

First the Good News
Domain is the only bit of Fairfax that's growing: Change in Ebitda since 2013 fiscal year, by division
Source: Company reports, Gadfly calculations
Note: Australian Metro Media includes the Sydney Morning Herald, Age and Australian Financial Review. Community Media has local Australian newspapers.

As one might expect, the initial proposal announced Monday by TPG and the Ontario Teachers' Pension Plan Board is a lowballer.

It would pay 95 Australian cents a share to get its hands on Fairfax's "good bank" -- the Domain real estate site, a grab-bag of online startups, plus the cherished but struggling Sydney Morning Herald, Melbourne Age and Australian Financial Review newspapers.

All the group debt would then be dumped with a "bad bank" valued by the bidders at 25 cents to 30 cents, containing Fairfax's local and New Zealand print and online publications, as well as its majority stake in Macquarie Media Ltd.  The bidders wouldn't touch any of that, and would leave it to Fairfax's existing shareholders.

Real-estate listings websites tend to trade on enterprise value multiples of 20 times Ebitda or more, compared with less than 5 times Ebitda for newspaper publishers that have seen better days. As a result, judging whether TPG has made a reasonable offer depends almost entirely on what you think Domain is worth.

Domain of the Gods
Real estate listings have made up for the collapse in earnings from Fairfax's local papers
Source: Company reports, Gadfly calculations
Note: Australian Metro Media Ebitda figures are reported excluding Domain Ebitda in all periods.

The bull case would assign Domain the median multiple of peer group companies such as Zillow Group Inc., Rightmove Plc, ZPG Plc, and the main Australian rival, REA Group Ltd. The print titles would then be valued at the median of Daily Mail & General Trust Plc, New York Times Co., Tronc Inc., Trinity Mirror Plc, and local competitors News Corp. and APN News & Media Ltd. Macquarie Media is already listed, so it could be marked to market.

A bear case might give Domain no credit for its faster revenue growth relative to REA Group and price it at a 20 percent discount, while assigning all the print titles APN's worst-in-class valuation of 3.1 times Ebitda.

What would those numbers suggest?

Online Discontent
The enterprise values of peer companies to Fairfax's units run the gamut
Source: Bloomberg

On the more optimistic estimates, Fairfax's good bank could be worth as much as A$1.50 a share, while the bad bank would get 39 Australian cents -- about 50 percent more, in aggregate, than TPG is offering.

The more pessimistic assessment would still price the good bank above TPG's offer, at 98.3 Australian cents. And while the bad bank would come in below target at 18.7 cents a share, the costs of that difference would fall entirely on Fairfax's existing shareholders.

How, then, to value Domain? REA Group, majority-owned by Fairfax's arch-rival in print, News Corp., has a fearsome dominance in the world of Australian real estate listings, with an 88 percent share of browsers' time -- but Domain has been catching up fast. Its share of revenue went from 25 percent to 32 percent of the two-company total between 2013 and 2016, while its Ebitda share rose from 20 percent to 26 percent.

Morgan Stanley points to the way ZPG's revenues have caught up with Rightmove in the U.K. to argue that a bit of disruption could see it valued more richly than REA, with an A$2.2 billion valuation -- more than TPG is offering for the entire good bank, even before you account for the debt.

House Building
Domain's share of the Australian real estate listings market has been growing fast
Source: Bloomberg
Note: Based on Domain revenue and Ebitda as share of Domain plus REA Group revenue and Ebitda.

That may be too rich, but Fairfax would be sensible not to roll over just yet. The company's striking journalists are campaigning against the job-cut plans under the slogan "Fair Go Fairfax." Management might want to ask the same of TPG.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Paul Sillitoe at