The REA Group Ltd (ASX: REA) share price is down 2% after its offer for Rightmove was rejected.
REA Group is the business behind realestate.com.au, while Rightmove is a similar business in the UK.
Takeover offer rejected
REA Group made a non-binding offer to Rightmove’s board of directors about a possible cash and share deal on 5 September 2024. This proposal was rejected on 10 September 2024.
The proposal was £3.05 and 0.0381 new REA Group shares per Rightmove share. At the time of the offer, this represented a total offer value of £7.05 for each Rightmove share.
It valued the total Rightmove business at approximately £5.6 billion.
However, with the REA Group share price down to below $199, down from $205.51, the offer is not quite as attractive as initially stated.
REA Group said this offer represented a 27% premium to Rightmove’s share price of £5.56 on 30 August 2024. It also represented an enterprise valuation of approximately 20.5x Rightmove’s EBITDA for the 12 months to 30 June 2024 of £272 million.
If Rightmove had accepted Rightmove’s offer, Rightmove shareholders would hold approximately 18.6% of REA Group on completion of the deal. The cash part of the deal would be funded from debt and existing cash.
What’s appealing about this for REA Group shares?
The ASX share said it expects the enlarged business to be able to rapidly reduce debt on the balance sheet thanks to strong growth and high cash generation.
REA said it intends to apply for a secondary listing of all of its ordinary shares in London. This would “provide the opportunity for a wider pool of investors to gain exposure to a global and diversified digital property company on the London Stock Exchange.”
The ASX share said it would apply its experience in investing in and growing adjacent services to support Rightmove in its ambition to accelerate expansion in those areas, while minimising execution risk.
That would include the benefit of a transfer of knowledge, leading technical capabilities and support targeted investment and innovation in a “competitive market”.
REA Group would also aim to “enhance the UK property experience for buyers, sellers and renters”.
Final thoughts on the REA Group share price
If REA Group is to succeed with this takeover approach, it will need to offer more value to Rightmove, which directly impacts how much value the current REA shareholders are getting, so I can understand why the share price is down.
I don’t think the ASX share was planning to make one offer and then walk away.
REA Group is one of the best businesses on the ASX, but making a large acquisition can be a risky move. However, the lower the valuation goes, the more attractive the company is for potential investors Its long-term profit growth potential in Australia, the US and India is exciting to me.
