Fairfax’s fate depends on Domain, not its board

The fate of the company is no longer dominated by its CEO and board but by Anthony Catalano and his Domain empire.

The TPG offer for Fairfax Media underlines a truth that the company will be reluctant to face. The fate of the once mighty Fairfax company is no longer dominated by its chief executive and board but rather by Antony Catalano and his Domain empire.

Once you recognise this dramatic change in the power behind The Sydney Morning Herald, The Age and the Australian Financial Review, it becomes much easier to release value for shareholders.

It does not necessarily mean that TPG will win, but the bid underlines the choices facing the Sydney-based Fairfax company.

Fairfax planned to release the value inherent in Catalano’s Melbourne-based Domain property business by creating a separate listed subsidiary that would be 60-70 per cent Fairfax owned and called Domain. Catalano would be its CEO.

That way the sharemarket value in Domain would be compared with its rival the REA Group, which is owned 60 per cent by News Corporation. The enhanced Domain value would boost the share price of the Fairfax parent, which is held back by its other assets.

The two Melbourne-based companies, REA and Domain, would fight it out to achieve dominance of the Australian real estate advertising business.

But there are clearly several weaknesses in the Fairfax proposal. First, much of Domain’s revenue comes from its close link with the three key Fairfax mastheads yet they would have a different ownership and board structure.

At least for the moment it would probably work, but it is a long-term recipe for disaster because Domain and Fairfax have very different cultures.

The TPG proposal is much neater with Domain owning its masthead outlets, the Herald,
the Age and the AFR and free from the Fairfax Sydney bureaucracy.

Under a private equity banner, the way would be open for all sorts of fascinating deals that are much easier to do outside a public company.

The overhead costs would be slashed and it is possible that Sydney and Melbourne families might find it very attractive to be involved with the SMH and the Age. But there might be better alternatives.

Alex Waislitz and his Thorney group has about 2 per cent of Fairfax and he is a friend of Catalano. Waislitz says that the TPG bid undervalues Domain. He is probably right but TPG is also buying the SMH, Age and AFR mastheads so it’s a total package. Nevertheless. it’s a clear signal.

In many ways, the Catalano story is the final irony in the Fairfax management and board saga that has covered many decades.

Catalano was an executive at the Age but left and set up his own business, grabbing a big slice of the real estate market. When Greg Hywood became settled as Fairfax CEO in 2013, he bought out Catalano and his supporters for $35 million.

It is not easy for a company to buy a business that a former employee has started but it was a fabulous deal for Fairfax because it created real value for the company.

Strangely a big chunk of the value of both News Corporation and Fairfax is their investment in enterprises that are run totally separately from the main company in a different city.