US investment company TPG Capital has abandoned its $2.76-billion bid to take over Fairfax Media, clearing the way for rival bidder Hellman & Friedman to make an offer.

TPG confirmed on Sunday that it had ditched plans to buy the owner of The Sydney Morning Herald, The Age and property classifieds business Domain, after looking at Fairfax's books.

"TPG has today exited the Fairfax due diligence process and has elected not to proceed with an offer," a spokesman said in a statement.

"TPG thanks the board and senior management team of Fairfax for the integrity and focus they have brought to the discussions."

TPG and Ontario Teachers' Pension Plan Board originally made a bid for Fairfax in May, initially offering 95 cents a share and quickly increasing it to $1.20.

Rival suitor Hellman & Friedman soon followed with an offer valued at between $1.225 and $1.25 a share, valuing Fairfax at up to $2.87 billion.

The Australian Financial Review (AFR) reported that TPG wrote to Fairfax chairman Nick Falloon on Sunday to tell him of its decision to walk away.

Hellman & Friedman has also written to Fairfax indicating it is still interested in making an offer but has yet to submit a binding bid, according to the Fairfax-owned AFR.

Both had been carrying out due diligence on Fairfax for much of the past month and were given until last Friday to submit formal offers.

But TPG decided to pull out amid concerns about the future valuations of Domain, the AFR reported.

"Fairfax had planned to spin off the assets but a serious professional investor in TPG has made clear the future of the business is not as bullish as the company has indicated," it said.

Some Fairfax shareholders have said the company could be worth up to $4 billion if it successfully spins off Domain (the only majorly profitable and growing division), which would be significantly more than the $2.7–2.9 billion flagged by the private equity firms.

The AFR said Fairfax was expected to announce plans to do so on Monday.

Key investor Thorney Opportunities backs that idea, and chairman Alex Waislitz wrote in an update to shareholders last week that the takeover approaches from TPG and Hellman & Friedman undervalued Fairfax.

Shares in Fairfax fell 10 cents, or 8.3 per cent, to close at $1.10 last Friday.

A Fairfax spokesperson was not immediately available for comment.

ABC/wires