Could REA be overpaying for Rightmove in the United Kingdom?
Investors are asking the question, as the group – 61 per cent owned by News Corp, publisher of The Australian – last week told the market it was considering a deal to buy the $10bn business for cash and scrip.
The Deutsche Bank-advised REA, which considers the real estate website realestate.com.au the jewel in its crown, has a market value of at least $26bn.
Citi analysts say that overall, while investors saw the financial rationale and the opportunity for earnings diversification, the strategic rationale was seen as a struggle, as most REA holders were concerned or nervous that REA would end up overpaying for Rightmove.
“One of the frequent questions from investors has been whether REA’s long-term play is for UK to become a vendor-paid advertising market similar to Australia, noting that Daft tried to do this in Ireland in recent years,” the analysts said in a note.
“Based on discussions with our UK colleagues, we see this as unlikely, especially given agents are non-exclusive.”
Three portals in the UK also made it difficult.
They question whether a 30 per cent premium is enough, saying UK investor feedback suggested that a 40 per cent to 50 per cent premium may be required for a deal to happen, based on recent deals at substantial premiums.
These include Keywords Studios at a 99 per cent premium and Ascential at 54 per cent.
Aristocrat’s rejected takeover offer of Playtech was at 58 per cent.
A 50 per cent premium could still be 9 per cent earnings-per-share accretive in fiscal 2026, assuming $50m of cost synergies and 20 per cent debt funding, but this left little room for error.
This is especially if marketing spend has to be stepped due to competition.
There has been questions about whether 5 per cent cost synergies are too high, with investors noting that REA would have to increase spend and rebase margins lower in order to thwart competition.
“While we do not expect cost synergies in sales staff or marketing, in our view REA should be able to leverage its product development and corporate teams across the larger business, and see cost synergy potential in about 50 per cent of Rightmove’s cost base which should result in direct cost reductions and/or cost avoidance in the future, even if marketing costs have to increase.”
One view being taken is REA’s UK expansion was to stop a potential entry by CoStar into its core Australian market down the line.
“While plausible, we see this as a bit of stretch.”
Citi’s CoStar analyst did not see Australia as being in its international expansion plans with the focus being on US and UK, the analysts said.
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