What REA learned from BHP’s London stalemate

Investors are now putting pressure on Rightmove’s London board to take a seat at the negotiating table for the $11bn offer.

REA Group, led by Owen Wilson, has lifted his takeover bid for Rightmove twice.

Property listings play REA Group has taken on the lessons of BHP’s unsuccessful efforts to navigate the hurdles of UK’s takeover code and has found a pressure point that works. Cash.

REA’s sweetened $11.9bn offer for London-based property listings play this week may have contained a slightly higher share component, but when it comes to investors applying pressure on reluctant boards, money talks.

Investors are now urging Rightmove’s chairman Andrew Fisher to take a seat at the negotiating table. This includes Australian-based concentrated fund GCQ Funds Management, a top 20 shareholder in Rightmove.

“We strongly encourage your board to commence engagement with REA Group,” GCQ’s Doug Tynan said in a letter to Rightmove’s Fisher following the REA sweetener.

Tynan sees potential for higher value in the combination of the two property companies, compared to Rightmove’s current growth prospects as a standalone company.

Rightmove is the UK’s biggest property portal.

After firmly refusing talks with REA and rejecting two indicative approaches from the Australian property listings major outright, Rightmove’s board has now softened its language. It will now at least consider this week’s sweetener.

That has left the door open ever so slightly for talks and potential price discovery. It is also significant that REA hasn’t yet declared its offer best and final, leaving it with a final card to play. REA’s boss Owen Wilson has also exchanged his base in Melbourne for London as the potential for talks come down to the wire.

REA is 61 per cent controlled by News Corp, which in turn is the owner of this masthead.

Under UK’s takeover code, the advantages are delivered to the takeover targets. There’s a limit on timing of approaches and if Rightmove’s board can hold out by refusing to engage, it can and run down the month-long clock.

This deadline is coming up on Monday from REA’s initial approach and until this week’s sweetener, Rightmove was happy to send the Aussie property disrupter and its investment bank Deutsche packing.

GCQ’s chief investment officer Doug Tynan

Without engagement of the Rightmove board, then it’s a case of put up or shut-up. Once the talk window expires, REA would have to either table its bid as a hostile offer which is risky, or go away for six months.

Of course, without a takeover premium built in, Rightmove’s shares risk reverting back down to where they started, and then the board will have to confront upset shareholders.

To date, the Rightmove board has held firm, which is their right under the prescriptive UK rules. But with a 43 per cent premium on the table to 12 month share price, this is starting to get serious for Rightmoves investors.

REA too has dangled the prospect of a London-based secondary listing to accommodate Rightmove’s shareholders.

Will it be enough?

GCQ’s Tynan suggests something closer to 800 pence per share, putting it in line with Rightmove’s highest share price and a 50 per cent premium. That compares to REA’s sweetened 770p offer, this would be at the very top of the preferred range, meaning it would be it harder for REA to extract value. Still, there could be some discovery on the cash or scrip component as well as dividends. The current deal represents 341 pence in cash and 0.0422 new REA shares.

Rightmove investors are betting REA has more room to move on cash.

European foothold

At the current scrip and cash ratio, any REA deal with Rightmove stands to dilute News’ holding in the property company to a fraction below 50 per cent. However, the size of REA stands to increase a third, with more growth to come. REA has indicated the increased cash would be funded by debt and existing cash reserves.

Through the bid, REA is looking at the UK to get a major foothold in Europe. And while it’s unusual to be targeting an established player rather than the building up its own franchise, Rightmove as the biggest player in the UK market, offers the quickest path to build out its franchise there. REA also sees potential to shifting the UK model away from subscription to a vendor-paid market similar to Australia. So too, there are potential savings with technology, marketing and development.

Earlier this year, BHP walked a fraught path in its efforts to seek talks with London-listed target Anglo American. It was finally a super-sized bump and decision to declare its offer “best and final” which prevents any more sweeteners that finally got Anglo to the negotiating table.

However, BHP made three key missteps, and these allowed the Anglo board to ride the UK rules to stay independent – for now at least.

The UK takeovers code gives target companies the advantage during takeover approaches. Picture: Chris Ratcliffe/Bloomberg

BHP’s bid was complicated, and it relied on Anglo spinning out two part-owned South African companies before the Australian miner took charge. This was asking Anglo’s investors to take on too much risk.

The timing of the BHP bid was made with Anglo in the middle of a strategic gap, allowing the London-miner’s chief executive Duncan Wanblad to come back to the market with a radical plan to break up the company that promised a longer term uplift in value.

Importantly, there was no cash attached to the BHP bid, leaving the only bargaining chip as its shares, meaning Anglo investors had no out for exposure to the commodity cycle.

To be sure, there is some opportunity. REA is making its move as UK cash rates are starting to drift lower, although slowly. This will eventually deliver a boost for the UK property market after interest rates have been stuck as the highest level since the global financial crisis.

Rightmove already delivered its long term strategic vision last November, which included a promise of a $1.2bn uplift in annualised annual revenue within the next four years. However, this only got lukewarm support from investors.

Before the REA approach, Rightmove’s shares largely flatlined this year, rising just 4 per cent, and that includes the significant support of a share buyback. If Monday passes without talks, and with few rival bidders in the position to stump up $11bn, REA can afford to bide its time. It’s a matter of whether Rightmoves investors are willing to be so patient.

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Originally published as What REA learned from BHP’s London stalemate