Domain’s sale to CoStar may give Nine $1.4bn in cash

The Nine Entertainment-controlled real estate listing company edges closer into foreign hands, which could reshape both the media landscape and the world of property listings.

Real estate listing company Domain has struck an exclusivity deed with US property behemoth CoStar.

Nine Entertainment-controlled real estate listing company Domain has struck an exclusivity deed with US property behemoth CoStar Group, advancing the $2.8bn take over that will put the target company in offshore hands.

The US company will now enter due diligence for four weeks on a deal that could reshape both the property classifieds market and the media landscape as Nine redeploys the $1.4bn it expects to reap from the sale of the business that has struggled since it listed.

The formal move came after CoStar last week made a sweetened non-binding indicative proposal to acquire Domain by way of scheme of arrangement for a cash of $4.43 per Domain share.

Domain directors intend to unanimously recommend the scheme of arrangement, subject to no superior proposal and an independent expert backing the deal.

The target company granted CoStar access to a virtual data room from today with the exclusivity period to expire in four weeks, which could be extended by a further two weeks CoStar’s takeover proposal remains subject to conditions, including completion of confirmatory due diligence.

Nine Entertainment said that as the controlling shareholder of Domain and “with a focus on the best interests of Nine shareholders”, it is supportive of Domain’s decision to grant due diligence access to CoStar at the increased offer price.

Greg Ellis was appointed Domain’s interim CEO in February. Picture: Supplied

But it is yet to disclose where it would put any proceeds, or if it would return them to shareholders, saying only that the sale would equate to cash proceeds to Nine of approximately $1.4bn net of capital gains tax.

The US company is looking to shake up the property listings market, which is dominated by the Domain’s larger rival, REA Group, which is majority-controlled by New Corporation, publisher of The Australian.

Cit analysts said last week after CoStar lobbed its final offer that a stronger Domain could impact REA’s longer term growth, however the larger company had a product road-map to underpin double-digit yield growth.

“While we expect the near-term news flow around a potential acquisition of Domain by CoStar to be likely negative for REA (e.g. increased marketing intensity) and its chief executive departure does bring in some uncertainty, we reiterate our Buy call,” Citi said, as it lifted its target price by 20 per cent to $275.

Citi cited REA’s strong product execution that is expected to drive double-digit growth in its core residential business as it also makes greater use of data.

“The key debate post CoStar’s bid for Domain is whether CoStar’s ownership could impact REA’s growth, with the bulls pointing to limited impact on market leaders from material increase in marketing in US and UK. In our view, the vendor-paid advertising model does make it easier for CoStar to compete in Australia (given listings coverage is already at parity) and the key question is what product innovation (in addition to increased marketing) that CoStar could bring to the market,” Citi said.

Morningstar analyst Roy Van Keulen wrote last week that the competitive environment was stable, and he expects Domain and REA to keep increasing prices at multiples of the rate of inflation.

Morningstar last week raised its fair estimate for Domain to $4.43 per share, up from $4.20 following the announcement of CoStar’s sweetened non-binding indicative proposal.

It assumes that Domain will be acquired at the level of the proposed offer, partly as it is well ahead of its stand-alone valuation of Domain at $2.65 per share.

“Our assessment is that there is a 100 per cent probability that the offer is accepted is based on the unanimous decision by the Domain board to engage with CoStar to facilitate due diligence,” Mr Van Keulen said.

“It is also based on the known willingness to sell the business by 60 per cent shareholder, Nine Entertainment and our view of the unlikelihood of a higher bid by another party,” he said.

The US giant could wring savings out of the Australian property listings operating once it takes it over. “We believe Domain is uniquely valuable to CoStar, as it can run the business at a significantly lower cost once it moves the business onto its own platform, thus boosting margins,” Mr Van Keulen said.

Morningstar queried whether CoStar’s takeover of Domain would hit its larger rival REA. “We don’t agree with the market sell off REA shares since the initial offer for Domain was made by CoStar. While we think CoStar’s ownership of Domain could increase competition, we believe this is offset by REA Group being able to raise prices further without facing regulatory scrutiny than otherwise would be the case.”

Originally published as Domain’s sale to CoStar may give Nine $1.4bn in cash