A complex business model and the prospect of ongoing restructuring are at the heart of two aborted takeover proposals for Fairfax Media.
A business model where property portal Domain is the prize and newspapers the problem is among the reasons two equity firms may have soured on a multi-billion dollar takeover of Fairfax Media, analysts say.
Rival bidders TPG and Hellman & Friedman both ended their interest in bidding for Fairfax at the weekend, with no reason given.
While Fairfax attributed the snub to its complicated portfolio, Citi analyst David Kaynes said costs in the metropolitan media division, which includes The Sydney Morning Herald, The Age and The Australian Financial Review, remains Fairfax's key trouble.
"Metro media, in particular with its single digit margin and double digit revenue declines, will require ongoing cost cutting and restructuring charges," Mr Kaynes said in a report.
Despite projected cost savings of $30 million in 2017/18, double digit revenue declines, $15 million in restructuring charges related to the cutting of 125 editorial jobs and negligible net cash flow mean Fairfax will need to keep the knives sharp, Mr Kaynes said.
"Fairfax will need to repeat those same cost savings every year and, in our view, is unlikely to stabilise revenue in the next few years," he said.
The metropolitan, regional and New Zealand newspaper divisions are key to determining the value of Fairfax, he added.
With both private equity suitors walking away after five weeks of due diligence, Fairfax says it will press on alone with a plan to separate the lucrative real estate portal Domain from its other struggling media divisions.
TPG's proposal valued Fairfax at $2.76 billion, while Hellman & Friedman's offer carried a value of up to $2.87 billion.
Morningstar analyst Brian Han said the two private equity suitors may have been deterred by Fairfax's newspaper operations, or it could have been the prospect of Domain having to compete with property classifieds giant REA Group at the peak of the property market.
"Perhaps Domain's earnings were buoyed to a much greater extent than anticipated by free marketing and traffic support from Fairfax's newspapers," Mr Han said.
Fairfax shares plunged almost 11 per cent on Monday, and were steady at 98 cents near the close of trade on Tuesday, their lowest level in almost four months.