Australian research firm Morningstar said Domain had been the lone shining light amid the gloom pervading Fairfax’s legacy businesses.
A full demerger of the multichannel property classified unit would leave Fairfax with a collection of "structurally challenged" print businesses whose combined operating earnings had slumped an average 18% over the past five years, a research note said.
"Doing nothing will result in a swift de-rating of Fairfax shares, which have been buoyed by the prospect of a Domain spin-off since early 2017.
"As such, we regard the ‘half-pregnant’ proposal of separating Domain but keeping a majority 60% shareholding as the appropriate future structure."
Fairfax would lose control over Domain’s cashflow once separated, except through dividend flows from Domain. But the halo effect of having Domain stock valued as a standalone Domain could be significant, Morningstar said.
Investors needed only to look at the 20-times enterprise value/profit REA Group shares were trading at to appreciate the insatiable investor appetite for anything with a whiff of technology attached.
The 60% shareholding provided management with valuable options, including as a funding vehicle for any corporate transactions Fairfax might pursue, the research note said.
Morningstar retained its A75c per share fair value estimate for Fairfax. Shares in the group were trading at a 28% premium to the assessment as investors remained buoyed by the potential value increase from the Domain separation.
Fairfax shareholders needed to vote at two meetings, both on November 2.
At the scheme meeting, the separation proposal must be voted on by more than 50% of Fairfax shareholders present and voting in person or by proxy, and by at least 75% of the total number of votes cast. At the annual meeting immediately following the scheme meeting, more than 50% of the votes cast by Fairfax shareholders must approve the capital reduction.
The capital reduction would allow Fairfax to reduce its share capital, the proceeds of which would be applied on behalf of shareholders as payment for the issue of new Domain shares. Eligible shareholders would receive one Domain share for every 10 Fairfax shares held.
In New Zealand, NZX-listed NZME and Stuff, the recently renamed New Zealand arm of ASX-listed Fairfax Media, confirmed they are committed to pursuing their appeal against the Commerce Commission’s rejection of the proposal to merge their operations. The two applied to merge in 2015.
