REA shares edge up as analysts weigh potential Rightmove buy
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The news: REA Group shares edged higher in morning trade on the ASX, as analysts weighed up the News Corp-controlled company's plan to acquire London-listed real estate platform Rightmove.
The numbers: REA shares were up 0.6% to $208.64 by 11:40am AEST, having ended 5.5% lower on Monday following the announcement.
The context: In a statement on the London Stock Exchange, Rightmove said it has not received an offer from REA. It noted that under the City Code on Takeovers and Mergers, REA must either announce a firm intention to make an offer, or not, by 30 September.
Citi analyst Siraj Ahmed said that the potential acquisition of Rightmove is likely accretive to REA's earnings. He also noted there is potential for REA to add strategic value, especially in Rightmove’s goal to expand into commercial and mortgages segments, as well as leveraging data and insights to strengthen the overall business.
However, Admed said the "key concern" is that the move comes at a time when there is increased competition in the UK residential portal market and also higher execution risk given the different market structure.
Despite this, he noted that REA's negative share price movement on Monday was "overdone", especially considering the early stage of the deal.
Meanwhile, Morningstar analysts said REA could increase Rightmove's leadership position in the UK, having consolidated its marketplace "much more" than its potential acquisition target, due to the absence of a third-place marketplace in Australia and the backing of News Corp.
Because of this, the analysts said, REA had evolved much deeper capabilities and monetised its leadership position much better than Rightmove. They said REA was almost four times as valuable than Rightmove as measured by market capitalisation, despite its home market population being less than half the size of Rightmove's home market.
They noted the key downside of the move is the wider competitive landscape in the UK, with a main competitor in Zoopla and a third marketplace in OnTheMarket, which is backed by CoStar Group with "significant financial resources" to ramp up investment.
What they said: "Rightmove has already established itself in the UK and operates in a market with good monetisation opportunities," Morningstar analysts said.
"Using REA Group's know-how, we expect Rightmove to become more effective in its operations and monetsation," they said.
"Sharing costs through certain synergies could provide additional benefits, although REA Group did not mention these."
The sources: Morningstar research, Citi research, London Stock Exchange
