REA Group now has the job of finding its next big growth engine

REA Group chief executive Owen Wilson at his office in Cremorne. Picture: Luis Enrique Ascui, NCA NewsWire

REA Group now has the job of finding its next big growth engine after walking away from its $10bn-plus UK target Rightmove, and the debate starts about where to find it.

Offshore markets

All the top online real estate groups are assessing acquisitions of top rivals in appealing markets over time.

REA, which is four times the size of Australia’s number two player Domain Group, has shown its interest is in buying the number one player in a market.

Rightmove in the UK is three times the size of number two player Zoopla.

In the US, the number one player is Zillow and REA owns the number two player Move.

But some analysts believe that its efforts to attack the UK market will be over for now after Rightmove, the nation’s number one location for online real estate advertising, rejected its fourth offer at 781p, up 1.4 per cent from its last offer, and REA Group said it was done for now.

It has the United States to focus on, where REA owns the number two player Move (operator of realtor.com).

The attraction for a $10bn-plus acquisition in the UK for REA was that it got to put to work its expensive share price.

But some had argued that if REA offered more cash to Rightmove, the deal perhaps would have gained more traction.

REA has stopped its chase for UK target Rightmove.

However, REA outlined in its statement on Tuesday that the lack of meaningful engagement and the consistent lack of information provided by Rightmove impeded the ability to progress discussions and work together towards a recommended transaction, within the timetable permitted.

A higher offer would substantially eat into REA’s margin and would leave little room for a miss in execution.

Macquarie analyst Darren Leung points out in a research note that the UK is a tough market, where real estate classifieds property specialist CoStar is a formidable competitor and has reduced returns of the incumbents in the US market with the UK next on its agenda.

The group provided an offer to acquire Move from News Corp and REA in January 2023 for a reported $US3bn but the proposal did not proceed and CoStar subsequently chose to address the US market by investing more in its homes.com offering.

CoStar entered the UK in late 2023 by acquiring the number three operator OnTheMarket for about £100m.

Adjacent businesses

REA said in a statement on Tuesday that it would focus on its core business, India and adjacencies (it recently bought almost 20 per cent in digital non-bank lender Athena).

While some believe that REA could gain growth through investing in adjacencies, smaller rival Domain Group tried this and the strategy never really gained any traction, is the view of some.

Could REA Group buy adjacent online classified businesses?

REA’s share price has doubled with its market value at $26bn whereas Domain has stayed flat with a $2bn market value.

Analysts say while capable, it would likely spread its capabilities too thin, with its expertise in online real estate.

Media groups in the past may have run classified advertising business across different industries such as jobs and vehicles, but now online websites own businesses across global markets, not just in one domestic market, so it’s a narrower focus with a wider reach.

Price rises and dominating over Domain Group

A question is whether REA Group can sustain annual price rises of 10 per cent for advertising, but REA would argue that the advertising is more important for the seller than the agent.

As a rough example, in an instance where a house is sold for $1m, an agent would take about $20,000 of the proceeds and REA about $2,500 to $3000.

Yet in the days when newspaper classified ads were around, a vendor would be paying $7000 to $10,000 for a newspaper ad.

REA is 61 per cent owned by Newscorp, publisher of The Australian, and has outstripped its competitor Domain, majority owned by Newscorp’s major rival Nine Entertainment.

In five years, REA’s share price has doubled with its market value at $26bn whereas Domain has stayed flat with a $2bn market value.

There’s some chatter that change could be soon afoot in the top ranks of Domain Group, and while its bankers at Jefferies are understood to be weighing options in the background to boost its performance, much of what direction it takes will depend on the views of the yet-to-be-appointed new Nine boss following Mike Sneesby’s announced departure recently.

Privatising the business with help from a private equity firm could enable Nine to inject more debt into the business, create a longer timeframe for a turnaround job out of the public eye and more aggressively consolidate the market.

There’s not thought to be any known private equity interest in Domain so far, but a recent deal in Europe shows there is some appetite for the sector from private equity.

Blackstone and Permira a year ago bid for Olso-listed online classifieds business Adevinta for $US13.2bn.