$2.7 billion bid for Domain puts Nine in a bind

Life should have been pretty comfortable for takeover target Domain Holdings. After all, real estate rivals sport as Australia’s unifying obsession, and how can you perform badly as one half of Australia’s real estate listings duopoly?

Well, let’s have a look.

When Domain listed in 2017, with former owner Fairfax selling off a 40 per cent stake, it was valued at a quarter of the market cap of rival REA Group, which is 61 per cent owned by Rupert Murdoch’s News Corp.

A successful offer for Domain could have a significant impact on both its major shareholder Nine Entertainment, and its News Corp-controlled rival REA Group. Credit: Peter Rae

If it had maintained that gap, it would now be worth about $8 billion. It was, in fact, worth just $2 billion before CoStar lobbed Friday’s offer.

Domain, 60 per cent owned by Nine Entertainment, which owns this publication, has been coming a distant third in a two-horse race.

As analysts from Morningstar put it: “Domain is significantly overshadowed by REA Group, which has the size and resources to drive down Domain’s market share and profit margins, should it so choose.”

Adding insult to injury, some experts say Domain’s survival is as much due to REA’s worry about what the competition watchdog would do if it was left with literally no competition.

Interim Domain boss, former REA Group chief executive Greg Ellis, has been on the Domain board since 2017.Credit: Eamon Gallagher

REA, which has a 40 per cent larger audience than Domain, reported Australian revenue of $1.35 billion for 2024 compared to Domain’s $390 million, and at a much larger profit margin.

Macquarie Research analysts noted the disparity in market power recently when Domain increased listing prices by 12 per cent and watched its volumes drop. A larger price rise at REA did not prevent its volumes rising further.

To give an idea of CoStar’s impact, the market sent REA’s share price plunging more than 10 per cent on Friday.

At the same time, Domain shares surged 40 per cent to $4.37, higher than the $4.20 offered by CoStar, and Nine shares jumped 20.1 per cent.

CoStar was meant to be consolidating its presence in Europe, but the opportunity proved too tempting.

The company’s chief executive Andy Florance said at a recent earnings announcement that it is “not possible” for REA to sustain its current growth trajectory. Not great news for Murdoch, who has relied on the soaring value of REA to buttress News Corp’s market cap.

And the timing was exquisite.

Domain’s interim boss, former REA Group boss Greg Ellis, started on Monday.

On Tuesday, the interest rate cut sent call volumes to mortgage brokers soaring as potential buyers checked on their buying power. It is a rising tide that will boost even a laggard like Domain.

Bloomberg Intelligence says Domain earnings could rise 40 per cent this year as “demand rises with (RBA) interest rate cuts”.

CoStar has not spoken publicly about the offer, but its track record in the US lays a clear path for revival.

Its listings platform, Homes.com, went from sixth place to the No.2 player by web traffic, thanks to a $US1 billion investment in sales, marketing and technology.

It is the sort of funding Domain desperately needs to turn around its performance. Especially on the technology front.

Part of CoStar’s strategy is to deploy its technology across different markets to give its operations an edge over rivals like REA. The impending multi-billion dollar acquisition of US 3D spatial mapping company Matterport is a case in point: CoStar is using its technology for 3D mapping of properties that could offer more authentic home simulation tours.

The question is, where does this leave the Domain board, and Nine, which will ultimately decide the fate of this offer?

They are both in the invidious position of saying a cash offer that is more than 40 per cent above its previous trading price undervalues Domain. It is not a great performance indicator for their combined stewardship. But what if Nine takes the $1.5 billion in cash and walks?

Domain accounts for more than half of Nine’s market valuation. The media group would be left with cash and a business valued by the market at well below the billion dollar mark thanks to the low multiples ascribed to its TV and metro publications amid the worst advertising downturn in a generation.

Bruce Gordon’s 25 per cent economic interest in Nine is all that would be standing between the future of the group and a classic private equity takeover play.

While CoStar’s funding and tech platforms are much-needed by Domain, Nine’s response on Friday highlighted the synergies for both Domain and Nine from its continued ownership and promotion of Domain across its platforms.

“Domain is of strategic importance to Nine’s media ecosystem and our long-term growth strategy. Nine will consider the proposal with a focus on the best interests of Nine shareholders,” it said.

The question might be whether some sort of deal could be hatched where Domain receives both the funding and tech from CoStar, and the promotion benefits of Nine’s platforms.

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