Breaking Property News 12/09/24
Daily bite-sized proptech and property news in partnership with Proptech-X.
REA Group targets Rightmove takeover
But is there clear logic in the huge deal as strategically, Rightmove acquisition is not an ideal fit?
The following article (1st edition) appeared on the 4th of September and was written and compiled by Angela Hawksford Director, Asia Pacific, (Advanced Interactive Media Group LLC) and published by the aimgroup (Business Intelligence for Marketplaces & Classifieds).
Angela Hawksford, ‘If you’ve been in the industry long enough, the news this week that Australia-based REA Group was mulling a potential takeover of its U.K. peer, Rightmove, must have felt like déjà. Almost 20 years ago, the company had contemplated making the same deal. Spoiler: It didn’t go ahead — and may not now. But as one former REA executive told us: “Everything old is new again.”
REA Group, which is more than 60% owned by News Corp., has until September 30 to say whether it will make a bid for Rightmove or not. In that time, anything could happen. Another bidder may emerge, a private equity firm may throw its hat in the ring. Or the whole thing could fizzle out. If REA does make a bid, Rightmove’s shareholders could always knock it back. A realistic deal could cost around $6 billion U.S.
Huge offer required for takeover
“Rightmove is a darling of the London stock exchange,” Andrew Stanton, U.K. property expert and founder of Proptech-X, told the AIM Group. “For shareholders to give up their golden annual payout, a large offer would have to be on the table.”
That sentiment was shared by Susannah Streeter, the head of money and markets at investment firm Hargreaves Lansdown. “Given Rightmove’s strengths, it’s highly likely that if a bid is put forward by REA Group, the Rightmove board and shareholders are likely to hold out for a significantly higher offer,” she told us. If REA did make an offer, it would undoubtedly need additional financing to fund the acquisition.
Kane Hannan, an equities analyst at Goldman Sachs, estimated that the company could raise up to AUD6.6 billion ($4.4 billion U.S.) before News Corp.’s stake would reduce to below a controlling 50.1% shareholding. Will News Corp. stump up any cash? Should the takeover go through, News Corp. would effectively control three of the world’s Top 10 real estate marketplaces by traffic — Rightmove, RealEstate.com.au and Realtor.com (which it owns through its 80% stake in parent Move Inc.), based on the AIM Group’s ranking of the world’s leading property sites last year. And the company would probably become the world’s leading property marketplace group by revenue, overtaking Zillow.
Rightmove in need of a renovation
There is a strong feeling among many property observers in the U.K. that Rightmove needs rejuvenating. Stanton called Rightmove “a wounded dinosaur” that’s “failed to digitally transform its operations.” “REA Group invests in a lot of technology and innovation to enhance its digital platforms and services,” Stanton said. “This is the innovation piece that Rightmove, the ‘digital dinosaur,’ lacks. This is the value proposition. REA also has great expertise in the commercial real estate space, where Rightmove is weak at present and, of course, is a huge, sweet spot for CoStar Group, whose DNA is in commercial real estate.”
Bigger, better … harder?
What’s changed in the two decades since REA Group last ran the ruler over Rightmove’s books? Well, both companies have gotten bigger. REA Group, which has a market capitalization of AUD27 billion ($20.3 billion U.S.), is a giant among property marketplaces. Rightmove is a little more modestly valued, with a market cap of around £4.4 billion ($5.8 billion U.S.). Both operate in mature markets — an apparent appealing factor for REA Group. “The REA board believes there are clear similarities between REA and Rightmove in terms of their market-leading positions in the core residential business, continued expansion and innovation of offerings across adjacent segments, leading audience share and strong brand awareness, as well as highly aligned cultural values,” the company said in a filing to the Australian Securities Exchange this week.”
That’s where their similarities begin and end. In Australia, where REA Group makes most of its money, home sellers pay their own marketing fees, a practice called “vendor-paid marketing.” Property prices are higher, agent commissions are higher, and transactions close quickly — typically six weeks after an offer is accepted. Lower commissions in the U.K.
By contrast, agent commissions in the U.K. are not only lower, but the cost of marketing is absorbed by the agent. By virtue of that fact, it’s also a more competitive classified market — Rightmove has two large competitors in Zoopla, the No. 2, and the CoStar Group-owned No. 3, OnTheMarket. Properties also spend more time on the market and take longer to close — up to six months is not uncommon.
“Cross-border synergies are de minimis in this business model,” Giles Thorne, an equities analyst at Jefferies, wrote in a note to clients. “Value creation will therefore be a function of REA Group bringing strategic execution insights into what is already a tightly managed business. … The large delta in valuation suggests the primary logic is financial.”
Tellingly, Australian shareholders were unimpressed. News of the potential takeover sent REA Group’s share price tumbling more than 7%, which still hasn’t recovered. By contrast, Rightmove’s share price — which has been depressed since CoStar’s acquisition of OnTheMarket — rose 27% following the announcement.
A spotty track record internationally
REA Group doesn’t have a great track record with international expansion. As part of a 50-50 joint venture with News Corp., it previously owned PropertyFinder U.K., a former No. 2 in the market. REA and News Corp., a few years after nixing the idea to buy Rightmove the first time, sold PropertyFinder U.K. to Zoopla for £1.5 million, a tenth of the price it originally paid just four years prior. In 2016, it also exited its other European businesses to focus on Asian markets.
In Asia, REA acquired IProperty Group, but made several missteps, allowing its Singapore based rival PropertyGuru to take leadership in Singapore and challenge it fiercely in Malaysia. At first, REA fought back, throwing good money after bad — and booking several impairments in the process. It even teamed up with Singapore-based 99.co to challenge PropertyGuru, transferring its assets in Singapore and Indonesia into a 50-50 joint venture to be run by 99.co’s CEO Darius Cheung.
Finally, it gave up, selling out of the 99.co JV and merging its remaining IProperty assets in Malaysia and Thailand with PropertyGuru, in exchange for a 19% stake in the business and seat at the board. Its shareholding eventually reduced to 17.2% when PropertyGuru listed on the New York Stock Exchange.
The surprise news earlier this month that private equity firm EQT would take PropertyGuru private and delist it from NYSE for a $1.1 billion U.S. means REA Group is likely to have windfall of approximately AUD383 million. REA prides itself on being a global company. Certainly, a big part of REA’s value to shareholders is its global footprint. But that footprint has shrunk considerably in recent years. It’s little wonder the company is once again on the M&A track.
A ‘categorically different’ acquisition
MorningStar equities analyst Roy van Keulen thinks REA Group’s interest in Rightmove shows it’s learned the hard lessons of the past. “We consider a potential acquisition of Rightmove to be categorically different from many of its earlier overseas endeavours,” he said. “These endeavours usually failed because they either tried to help an existing player consolidate its market, which we believe is difficult and costly, or they were in an emerging market with limited monetization opportunities.”
Van Keulen sees great strategic opportunity for REA Group to materially improve and better monetize the Rightmove business. “We also believe REA Group can increase Rightmove’s leadership position in the U.K.,” he said. REA Group has a top product development team. In Australia, its ability to continue developing new listing products that deliver value to agents enabled it to keep growing revenue and listings coverage, while market share at its rival, Domain, has slipped. “It is worth crediting REA with being a strong operator in Australia, having taken revenue share from the No. 2 player, Domain Group, in the last six years,” Thorne conceded.
Success in India
The company also turned around the fortunes of Elara Technologies, now known as REA India, which operates property site Housing.com and real estate brokerage PropTiger. Since taking control of the business during the pandemic, Housing.com has snatched market leadership — by traffic and quite possibly revenue, too — from long-time leaders 99Acres and MagicBricks. By sharing product and technology capabilities, the company has grown average revenue per agent (ARPA) and yields by increasing the penetration of its depth listing products.
Can REA replicate the success it’s had in India — where, it should be noted, agents pay for marketing — in the U.K. and get agents to shell out more money for better listing products that deliver more leads?
Fat chance of that happening, according to Stanton. The U.K.’s lower rates of commissions leave agents already squeezed on margins. “Many agents now trade on an 8% or 10% margin and those fixed costs are a killer. Every year, Rightmove looks to increase its listing fees by 10% — hence its 70% gross profit margin — but for agents it’s one of their biggest monthly costs,” he said.
Limitations on price increases
Stanton suggested that, depending on how OnTheMarket responds, Rightmove could find itself constrained with how aggressively it could raise prices. Likewise, Streeter, of Hargreaves Lansdown, told the AIM Group that while REA Group could bring a tonne of expertise to the market, “there are still risks ahead.” “The number of estate agents are falling as DIY alternatives grow in popularity and more estate agents look set to be forced out of business. This could hamper Rightmove’s ability to cross-sell premium advertising packages.”
The U.K. is also hampered by its infamous “chain system,” in which property transactions are lined up like dominoes. Should just one transaction drop out or fall through, it risks the whole chain collapsing. This makes it challenging to convince agents to spend more money on listings — especially if, like in Australia, they’re only active on the site for 30 to 45 days — if the agent has to relist the property again in several months’ time when the sale falls through.
But Streeter said an acquisition by REA Group could strengthen Rightmove’s position against CoStar-backed OnTheMarket. There may also be some, albeit small, synergy with the News Corp. media assets in the U.K., which could provide Rightmove with some cross promotional opportunities that may be a helpful as a defensive strike against OnTheMarket. Streeter thinks this could also force CoStar to drive more consolidation in the market. “There is a potential for a bid for Zoopla to strengthen [OnTheMarket’s] offering,” she added.
Could U.K. become a vendor-paid market?
The big question is whether REA would attempt to turn the U.K. into a vendor-paid market. As Ivor Ries, the former Morgans Financial research analyst, pointed out, it’s a tempting proposition. “REA’s average revenue per real estate agency customer is more than double that earned by Rightmove, mostly driven by its unique vendor-paid ‘Premiere’ advertising product,” he wrote on LinkedIn this week. That said, such an undertaking would be extraordinarily difficult and, put simply, very unlikely to succeed — not to mention it risks a great deal of reputational harm. OnTheMarket could weaponize the move against Rightmove to grow its share of consumer traffic, like the “your listing, your lead” campaign CoStar is running against Zillow in the U.S. is designed to weaponize Zillow’s business model to grow Homes.com’s share of agent customers. “Is the U.K. ready for vendor-paid advertising?” Ries asked. “We may be about to find out.”
Note – Ben Salisbury contributed to this article. (At present the initial offer has been rejected by the Rightmove board).
Andrew Stanton Executive Editor – moving property and proptech forward. PropTech-X
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