Domain takeover play unlikely to slow REA growth trajectory

The takeover bid lobbed for Nine-controlled Domain by US digital giant CoStar is unlikely to hit market leader REA hard, top analysts say.

REA has emphasised it is growing revenues from premium services, as well as the deeper value it is providing to agents. Picture: NewsWire / Max Mason-Hubers

The takeover battle for Domain Holdings is unlikely to hit the long-term growth trajectory of market giant REA Group with the share market turmoil presenting a buying opportunity, according to brokers.

While REA shares were sold off on Friday as investors speculated about the impact of CoStar-run Domain, outspoken broker Angus Aitken pointed to the company’s dominant position in digital real estate.

The Aitken Mount Capital Partners partner said REA stock presented as great a buying opportunity as it did last year when the company was chasing British property portal Rightmove and it traded below $200.

After its attempts at engagement with its target were brushed aside, REA shares soared as it refocused on domestic plays.

REA is majority-owned by News Corporation, publisher of The Australian. and its shares fell 11.4 per cent on Friday to $236.18.

“REA is the most dominant and growing business we look at on the ASX, and if there was any arrogance or complacency, or they were totally overcharging for what they provide, of course I would be worried, but they don’t,” Mr Aitken said.

REA has emphasised it is growing revenues from premium services, as well as the deeper value it is providing to agents.

Large agencies also rely more on REA for leads, partly as it has invested in both new technology and set up a huge consumer footprint via its membership model.

Mr Aitken argued that Domain had been unable to crack REA’s advantages.

“Domain has been an absolutely terrible business since its IPO, they have had no shortage of capital and they achieved zero,” he said. “I am not convinced the new owners of Domain will do much better but you aren’t going to know for three or four years regardless.”

Although the initial shots have been fired, the outcome of the takeover battle is far from clear.

Domain shares soared as much as 53 per cent to a three-year high of $4.67, well above CoStar’s non-binding offer to buy the company via scheme of arrangement at $4.20 a share, an offer worth about $2.7bn. The rally above the offer price came as Citi says the offer price is “likely not enough”.

“While the offer price is about 30 per cent higher than our target price, we think the bid price will likely need to be higher,” Citi said. It cited recent positive investor sentiment for Domain after a pick-up in yield growth.

The offer price values Domain at 18.7 times fiscal 2026 earnings before interest, taxes, depreciation, and amortisation, only 4 per cent above Domain’s long-term average. “Also, CoStar would likely need Nine (Domain’s 60 per cent shareholder) to drive consumer share given Domain has seen improving audience metrics by working closely and collaborating with Nine,” he said.

”In our view, the vendor-paid advertising model could make it easier for CoStar to compete in Australia – given listings coverage is already at parity – but we see it as difficult to break the network effects of the number one player and see REA as having plenty of cost base flexibility to increase marketing spend if it needs to,” Citi said.

“Further, REA’s product road map underpins yield growth for the next 2-3 years and is unlikely to be impacted by competitive dynamics.”

E&P analyst Entcho Raykovski said CoStar’s financial capacity for and history of acquisitions as well as increased interest in the Australian property market, underpinned its pursuit of Domain.

“CoStar certainly has the financial capacity for an acquisition of Domain,” he said, pointing to its moves in the US and Britain.

Barrenjoey analysts said investors May debate how it would affect REA’s investment, marketing spend, price increases.

“We note REA’s substantial lead over Domain on audiences (4-5.5 times) buyer leads, tech/product, salesforce numbers,” they said. “On price increases, history shows REA can maintain double-digit yield irrespective of Domain (REA) unlikely to be cut from marketing budgets, given its dominant share of buyer leads.”

Domain this month delivered a 46 per cent lift in its net profit for the first six months of the financial year to $35.7m.

Originally published as Domain takeover play unlikely to slow REA growth trajectory