Domain plays it cool with suitor CoStar after $2.65bn bid

CoStar founder and president Andy Florance.

Domain Group and its major shareholder, Nine Entertainment, appear to be taking their time to determine whether to accept a $2.65bn buyout proposal from CoStar.

But the lack of engagement with the global online real estate group suggests its attempts to buy Nine’s most valuable asset will be rebuffed.

DataRoom sources say that CoStar, founded and run by Andrew Florance, has not had any engagement with Domain – of which Nine owns 60 per cent – since it bid for the business.

Observers have taken this as a sign a rejection is coming.

But investors appear to be betting that Mr Florance, who has aggressively expanded his empire through global acquisitions, will not take no for an answer and will offer more money for the business.

His bid was at $4.20 per share but Domain shares are currently trading at $4.35, making the market value of the industry’s No.2 player behind REA Group about $2.74bn.

There’s divided opinion about whether selling Domain is the right decision for Nine and whether it will eventually part with its prized business.

On the one hand, sources say that Domain will eventually be forced to accept the offer because of pressure from minority investors who will want the cash.

But on the other hand, Domain is by far Nine’s best asset, and it’s the prime reason why a lot of investors put money into the business.

It would be impossible for the group to replicate or replace, and it is defensive because the television, print and streaming parts of the business are cyclical and hard hit by lower advertising revenue in a weaker economic environment.

Nine’s streaming service, STAN, also faces headwinds in a highly competitive environment.

As well as digital streaming and free-to-air television, Nine owns newspaper titles, including The Sydney Morning Herald, The Age and the Australian Financial Review.

Working for Domain is UBS while Macquarie is working with CoStar, and Jefferies with Nine.

CoStar has already amassed 17 per cent of the business.

The $US32bn CoStar is based in the US, and has invested heavily in marketing to take residential online real estate businesses to the number two or number three position.

At the time it purchased the shares in Domain last month, the price was a 34.6 per cent premium to its last traded share price on February 20.

One option is to convince CoStar to buy part of Domain whereby Nine retains an interest and can stay in the picture to provide value by way of marketing.

But the talk earlier was that Mr Florance was not of a view he needed Nine as a stakeholder.

As previously reported, Domain Group is said to have been shopped to private equity firms to test their interest in taking a stake in the business. Its performance has lagged its major News Corp-majority owned rival, REA.

TPG Capital has looked and Kohlberg Kravis Roberts has previously considered a buyout of Domain Group but later walked away.

Greg Ellis, the former boss of REA Group, has been appointed in the interim to lead Domain Group, replacing Jason Pellegrino, while a search for a permanent chief executive is ongoing.

Domain delivered a 46 per cent lift in its net profit for the first six months of the financial year to $35.7m on the back of continued listings growth.

CoStar employs about 6550 staff in 13 countries.

It owns the number-three player in the UK, OnTheMarket, and the number-two player in the US, Homes.com, which the company has outlaid $US1bn on in marketing costs to boost its market share and is the US industry leader in commercial real estate.

One point of focus is the level of capital gains tax Nine would pay with a sale of the Domain business.