REA Group Limited (REA Group, ASX: REA) is a multinational digital advertising business specialising in property that is 61 percent owned by News Corp Australia, a subsidiary of News Corp. It operates Australia’s leading residential and commercial property websites, with its flagship site, realestate.com.au, being Australia’s number one property site. The Group also operates the data and insights business, PropTrack, and a leading mortgage broking business, Mortgage Choice. Internationally, REA holds a controlling interest in REA India and a 20 percent stake in Move Inc., operator of realtor.com in the US.

Proposed offer for Rightmove plc discontinued

REA Group has decided not to proceed with a cash and share offer for UK’s largest online real estate property portal, Rightmove plc. This decision follows REA’s stated intention on September 2 to make an offer to Rightmove plc shareholders for the entire company.

REA’s approach has been firmly rebuffed by Rightmove’s board who has not meaningfully engaged with REA nor provided any useful material that would allow REA to make a formal and detailed offer to Rightmove shareholders. Contact between the boards of both companies has been cursory and procedural. This is despite REA’s proposed offer being pitched at a 45 percent premium to Rightmove’s 12-month and 24-month volume weighted average share prices.

REA share price rises 5 percent on decision not to make an offer

REA’s share price has responded positively to the news and is up about 5 percent on the day that REA announced the decision not to proceed with an offer. There are two likely reasons for the price rise.

Firstly, the proposed offer amount had been increased four times and was firmly rejected each time, with the fourth offer widely considered to be above what appeared justifiable on value grounds. This view is supported by the immediate 7 percent fall in Rightmove’s share price in response to REA’s announcement that it did not intend to proceed with an offer.

REA investors expressed a similar view by way of what could be interpreted as a ‘relief rally’ in not having their equity interests diluted with a cash and share offer that may not be value accretive to REA. The un-written rule in corporate takeovers for the acquiring entity is that a sensible acquisition is acquiring more than what you’re paying for; the market’s view is that REA’s fourth offer proposal did not represent compelling value for REA shareholders.

REA’s immediate share price rise is likely due to short covering by hedge funds that short-sold REA shares after news of its proposed bid. These hedge funds expected to buy back shares at a discount when REA raised equity for the scrip component of the Rightmove takeover. However, as the offer did not proceed, hedge funds exited their short positions at a small loss, driving the share price up as they repurchased the previously shorted shares.

Global expansion strategy to continue

REA remains firmly committed to its strategy of creating a globally significant and diversified leader in the digital property sector. The board have recently referred to other growth opportunities ahead of the Group, including India and Athena Home Loans.

Athena Home Loans is an adjacent market for REA which owns 100 percent of Australia’s largest mortgage broker, Mortgage Choice, while India is more of a core business opportunity.

To date REA has displayed respect for shareholder’s capital by adopting a financially disciplined approach to M & A and reinvestment decisions in its business. The ongoing pursuit of these and other growth opportunities is likely to generate ongoing value accretion to REA shareholders.