* TPG proposes to pay A$0.95 per share for most of Fairfax
* Fairfax shares traded A$1.06 the day before offer
* Proposal interrupts plans to spin off property classifieds (Recasts, adds investor comment, shares)
By Byron Kaye and Jamie Freed
SYDNEY, May 8 (Reuters) - U.S. buyout firm TPG Capital Management led a A$2.2 billion ($1.6 billion) approach for most of struggling Australian newspaper publisher Fairfax Media Ltd, a move Fairfax shareholders quickly rebuffed as too low.
The cool response suggests TPG and partner the Ontario Teachers' Pension Plan Board (OTTP) will need to raise their indicative 95 Australian cents per share offer, which is below Fairfax's last closing price.
It also interrupts Fairfax's much anticipated plan to unlock shareholder value by spinning off its lucrative property listings unit, Domain, the most valuable part of the business after a collapse of earnings at news mastheads The Sydney Morning Herald (SMH) and The Australian Financial Review (AFR).
The proposal involved the North Americans taking just Domain, the SMH and the AFR, leaving shareholders with the publisher's New Zealand titles, its stake in a online television streaming start-up and its debt.
"It's an easy thanks but no thanks," said Lee Mickelburough, head of Australian equities at Henderson Global Investors Ltd, which owns about 5 percent of Fairfax shares.
"It's a troublesome structure to say that we get 95 cents for the good business and you get to keep the debt for the transition businesses. It's cheeky, the way they've structured it."
The approach on Friday came days after many Fairfax journalists walked off the job in a weeklong strike over yet another round of editorial job cuts, as management slashes costs in an effort to turn around its loss-making newspapers.
It also follows a regulator's rejection of its plan to sell its New Zealand arm due to competition concerns a week ago.
Fairfax wrote down the value of its media assets by nearly A$1 billion last August, and has said it needs to overhaul its business to cope with a massive downturn in advertising revenue which is driving down profit at newspapers around the world.
On Saturday, however, the government unveiled a plan to deregulate media ownership rules, opening the door for alternative offers for Fairfax.
Fairfax shares rose as much as 7 percent in early trading, while the broader market was up 0.5 percent. They eased to be trading up 3 percent as investors shrugged off the TPG proposal.
"Based on the potential for substantial profit increases for the Domain group in coming years, the cash component of the bid appears to be on the low side," said Alex Waislitz, chairman of Thorney Opportunities Ltd, a shareholder activist company which holds Fairfax shares.
A TPG spokesman declined comment, while an OTTP spokesman was not immediately available for comment.
Fairfax said it was reviewing the proposal but there was "no certainty" it could proceed given the complexity involved in splitting the businesses. ($1 = 1.3532 Australian dollars) (Reporting by Byron Kaye and Jamie Freed; Editing by Stephen Coates)