By Andrew Main

There’s a moment in every takeover situation when the target’s response moves from “don’t be ridiculous” to “mmm” and in the case of the joint TPG/Ontario Teachers’ tilt at Fairfax Media, we’ve just passed it. 

As of late on Sunday, the bidding group (which also involves one other mystery party) lifted its bid from 95 cents for some of the business, to $1.20 a share for all of it. 

The latter values the whole group at $2.76 billion, compared with the original cherry-picking tilt at $2.2 billion.

The first bid was for the best known elements, being the major newspaper mastheads, the Domain real estate group, and some other assets such as the events business and all of Fairfax’s digital business except its half of the Stan streaming venture.

It’s interesting to note that the bidders apparently referred to their first 95 cent bid informally as “Domain Co” which tells you emphatically which bit’s the dog and which bit’s the tail.

That’s been further amplified by the revelation in yesterday’s The Australian that Domain founder and CEO Antony “The Cat” Catalano was having back-channel chats in Melbourne with TPG’s man on the spot, Joel Thickins, before Thickins even met with Fairfax chairman Nick Falloon.

All of which suggests that while we’re unlikely to see any dramatic official action in the next few days, the mumbling from insiders at Fairfax - who like to chat about what’s going on - will rise in volume to a level where Falloon and/or CEO Greg Hywood will have to bring the Omerta rule to bear.

For a start, Hywood wants to float Domain to increase overall value while Catalano doesn’t just want to keep the real estate arm in-house, he reportedly wouldn’t mind running the entire Fairfax operation. 

Just on Monday, Fairfax board member “Hungry” Jack Cowin was saying that negotiations are moving to getting the “right price” for the business, which at least has the merit of being true. He’s got three million reasons (worth $3.6 million and rising) to be interested in the outcome. 

It’s going to take a while as the bidders don’t want to go hostile and can only now get to do their due diligence on the books. Any decision by the board to accept will require a unanimous recommendation by directors and then there’s the little matter of the Foreign Investment Review Board.

Those of us who were around when Fairfax was refloated in 1992 can remember how Canadian proprietor Conrad Black railed loudly against being limited to 15%, despite the fact that he controlled the whole outfit and chose the board. (Doesn’t that seem like a very long time ago?).

Nostalgists should note that we’ve now got a new bunch of Canadians knocking on the door, but they are much less aggressive. TPG is almost certain to break the business up, whereas the Ontario Teachers’ Pension Plan is a very well run outfit that usually prefers a passive role in long term assets such as infrastructure. A strange pairing but the Plan managers clearly see a bargain ahead.

Just looking down on the deal from above, of course it’s a shame that Australia’s longest established major newspaper group is now firmly on the block, but the obverse of that is that it’s good someone wants to buy it.

This is an outfit that’s in the process of cutting around 25% of its reporters from the Australian Financial Review, the Sydney Morning Herald and the Melbourne Age, and has given up pretending it’s good for journalism. Hywood’s more recent line was more about keeping the business going, which is also true.

And the share price performance has been a relief of sorts for those rusted-on holders who can remember the price at $5 back in the good old days of classified advertising. 

It opened up one cent yesterday at $1.15, having been below 85 cents as recently as late January, and closed more than 3% higher at $1.18.   

So, is it a buy? There’s basically a floor of $1.20 under it as long as the sale process goes through. As of this week, the big institutional holders are expecting to see a higher price, say $1.40. Most of the big brokers are getting warmer on the stock, off a very tepid base. Citi, for instance, has just lifted its call from sell to neutral but has an earnings based target of exactly $1.20 on the stock, up from 85 cents.

No one’s been talking much about earnings but there is a lot of blue sky above Domain, which is valued by most experts at almost $2.2 billion on its own. The parts of Fairfax are still probably worth more than the whole.

There are, of course, advantages in Domain retaining a connection with the newspaper business from which it emerged, which could still happen if Domain was floated and Fairfax retained a stake.

So if the deal did fall over, and I haven’t even mentioned there could be problems ticking off the sale of Fairfax’s New Zealand assets to a foreign buyer, there’s blue sky around from a number of assets headed by Domain, that sadly don’t include the major mastheads. They’re valued by most analysts at zero as that’s where they are ineluctably heading. 

I’ll never forget the advice I got a few years ago from a senior Fairfax executive who shall remain nameless. I asked him if I should buy some shares and was told ”they’re not for putting in the bottom drawer.”

That was good advice, as relevant today as ever. Fairfax is a beast that will have to change no matter what, but it is probably still undervalued. The big point for investors is not to be sentimental about what it was, but instead to be hard headed about what it might be.