Murdoch’s REA Shouldn’t Expect an Open Door at Rightmove

(Bloomberg Opinion) -- Surfing for real estate, peeking at photos of other people’s kitchens and checking on house prices are among Britons’ top pastimes. Small wonder foreign investors see an opportunity in the UK’s property portals. Monday brought news of interest from Australia’s REA Group Ltd., controlled by 93-year-old media tycoon Rupert Murdoch, in leading property website Rightmove Plc. As every property expert knows, it’s easy to look — and hard to buy.

Rightmove’s stock has had a difficult few years. It closed Friday pretty much where it was at the end of 2019, valuing the company at £4.4 billion ($5.8 billion). This may be the foremost real estate website in the UK, but investors have had a lot to fret about. The end of the ultra-low interest-rate era has dampened the property market, and the competition has intensified with the recent takeover of smaller rival OnTheMarket by CoStar Group of the US. CoStar has flagged aggressive expansion plans.

Rightmove’s profit margins are already among the highest in the sector. Investors could be forgiven for thinking the firm’s best years are behind it. The company has a strategy to diversify beyond residential property into areas such as mortgage broking and commercial real estate; the stock market wants to see it deliver.

As analysts at Peel Hunt point out, all this has left Rightmove one of Europe’s cheapest publicly traded classifieds players. Prior to REA’s interest surfacing, the UK company was trading at around 15 times profit as measured by earnings before interest, tax, depreciation and amortization. Peers average 21 times, according to data compiled by Bloomberg data.

There would be limited cost savings in a cross-border combination like the one REA is contemplating. That would ordinarily limit how much of a premium a bidder could pay. But the low starting valuation creates a cushion to pay a top-up in return for a commanding position in the UK. Panmure Liberum analysts argue that the cheapest way to become the number one property portal is to buy Rightmove, not to buy OnTheMarket and attempt to scale it.

Murdoch might also see a simple punt on a recovery in the property market here, now that UK rates are easing with August’s cut and the recently elected Labour government has made housebuilding a policy priority. REA’s expertise in non-residential property classifieds could potentially help Rightmove expand into those new areas more successfully — that’s certainly hinted at in the Australian suitor’s explanation of its interest in a cash-and-stock bid.

Finally, REA also has a financing advantage. Its stock is priced at a multiple of earnings nearly double that of Rightmove’s. That’s helpful for raising money or offering stock as part payment for Rightmove shares.

For all this, Murdoch’s investors are nervous, judging by the slide in REA’s stock price. Some of the decline will likely reflect concern about generating new shares to finance a deal, including the risk that UK investors dump any such paper issued as part payment. The wobble in REA’s stock could also rightly reflect the possibility that Rightmove’s investors will resist all but a knockout offer. The recent history of UK bids is for high premiums to compensate for low starting valuations. Analysts at Panmure Liberum call for a 60% premium here — that’s no longer uncommon in the UK.

OK, such an offer might be a stretch here. Even at a 30% premium, a deal would cost around £5.7 billion. With Rightmove saying it is targeting operating profit of around £420 million in 2028, post-tax returns here might not be much above a mid-single digit percent — unless REA can conjure some synergies or implement Rightmove’s strategy notably faster.

It’s not obvious Rightmove can’t do by itself a lot of what REA might bring. Diverting cash from share buybacks to investment could accelerate the business plan, as Panmure notes. And nor is it clear that Murdoch’s interest will endure if he can’t pay an opportunistic price.More From Bloomberg Opinion:

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Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.

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