Here's what Fairfax would look like after takeover by US private equity giant TPG

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Fairfax Media is in play.

US-based private equity group TPG and the Ontario Teachers’ Pension Plan Board have made a joint bid to acquire Fairfax for a combination of $2.18 billion in cash plus shares.

Some of Fairfax’s most visible assets, including the major newspapers of the Sydney Morning Herald, The Age and the Australian Financial Review, would disappear from a publicly listed company into private ownership.

What’s left over, including a long list of community and regional newspapers and websites, would be rolled into a new ASX-listed company.

The TPG consortium has bid 95 cents a share for the highly profitable Domain business, the major newspapers and other titles in the Metro Media division, the Events business and Digital Ventures, excluding the streaming media joint venture Stan.

Current Fairfax shareholders would then keep 100% of Australian Community Media, New Zealand Publishing and shareholdings in Macquarie Media Limited and Stan through a new ASX-listed company.

At the Friday’s close price of $1.06 a share, the market valued Fairfax at $2.437 billion. The TPG bid implies a value of at least $253 million for the second group of assets to be dropped into a new listed vehicle.

There are a lot of conditions attached to the bid, including due diligence, a shareholder vote and regulatory approvals, including the Foreign Investment Review Board.

“There is no certainty the indicative proposal will result in an offer for Fairfax, what the terms of any offer would be, or whether there will be a recommendation by the Fairfax board,” Fairfax said in a statement to the ASX.

“Regardless of any potential proposal, the Fairfax board believes that Fairfax has a very attractive future and that the Company is well positioned to continue to deliver shareholder value. Fairfax is continuing to progress the announced potential separation of Domain group.”

A key assumption behind the bid is that Domain hit EBITDA (earnings before interest, tax, depreciation and amortisation) in 2017 of $115 million.

And that the combined EBITDA of Metro Media, Events and Digital Ventures reaches a broker consensus of $34 million.

The proposed new company — with the Australian Community Media division, New Zealand Media, shareholdings in Macquarie Media (radio) and Stan — will also take on Farfax’s existing debt, which at last report sat at $111.9 million.

The new company will have some of the weaker performing assets. In the last half year results, Metropolitan Media revenue was down 8.2%, Community Media dropped 12.2% and New Zealand 8.1%. Radio revenue was up just 1%.

Here’s the revenue from each division, as reported in February for the first half of 2017:

Analysts have valued the Domain business alone at more than $2.05 billion which makes the $2.18 billion in cash for Domain plus the metropolitan newspapers and other bits and pieces look a little light.

And Fairfax’s current plan is to split Domain and list it on the ASX while keeping a 60% to 70% controlling stake.

Foreshadowed changes to media rules could also push higher the valuation of Fairfax’s newspapers. At the weekend, communications minister Mitch Fifield announced plans for the elimination of the “two out of three” rule.

This means one company would be able to own metropolitan newspapers, television and radio stations in any capital city.

Fairfax also has been stripping out costs from the major newspapers, a move that also makes the mastheads more attractive.

Journalists in the metro division are currently on strike over a plan to cut 125 staff as part of a $30 million cost-saving move.

(Disclosure: Allure Media, the publisher of Business Insider, is 100% owned by Fairfax Media.)

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