REA Group Ltd, the Australian property listings giant, is facing a sharp drop in its share price after its £5.6 billion bid to acquire UK-based Rightmove Plc was rejected. On Wednesday morning, REA Group shares fell 2% to AUD 198.55 following the news that Rightmove’s board had dismissed the offer. This move signals potential challenges ahead for REA Group as it aims to expand its reach into the lucrative UK digital real estate market.

REA Group’s Ambitious Offer to Rightmove

REA Group, known for its dominant property platform realestate.com.au, proposed a non-binding offer to Rightmove on September 5th. The offer consisted of 305 pence in cash and 0.0381 new REA shares for each Rightmove share. Based on REA’s prevailing share price of AUD 205.51 and the current exchange rates, this offer valued Rightmove at 705 pence per share, equating to approximately GBP 5.6 billion or AUD 11 billion. This valuation represented a 27% premium to Rightmove’s undisturbed share price of 556 pence as of August 30, 2024.

REA Group emphasized that its proposal included a mix of cash and shares, giving Rightmove shareholders approximately 18.6% of the combined group’s issued share capital upon completion of the proposed transaction. The cash component was to be funded through third-party debt and existing cash reserves. REA management argued that the combined company, benefiting from the strong growth and high cash generation of both businesses, would be able to rapidly reduce its debt levels.

Rightmove’s Rejection and Market Reactions

Despite REA Group’s assurances of value and growth, Rightmove’s board rejected the proposal on September 10, 2024, without publicly providing specific reasons for the decision. Analysts speculate that the board believes the offer undervalues the UK company, given its strong market position and future growth potential.

The rejection of the offer has sparked concerns among investors about the financial implications for REA Group. Some market analysts suggest that REA Group might need to increase its bid to persuade Rightmove’s board, a move that could further strain its financial resources. This uncertainty led to a decline in REA Group’s share price, reflecting fears of overpayment and the strategic risks associated with entering the competitive UK property market.

Expert Opinions: Overpayment Concerns and Strategic Risks

Several analysts have shared their perspectives on REA Group’s bid to acquire Rightmove, highlighting both the potential advantages and risks of the deal. Some view Rightmove as an attractive acquisition target due to its stable core business in property classifieds and the potential for growth in related sectors, such as mortgages and commercial real estate. However, there are concerns that the current offer from REA Group may already be on the higher side, especially considering the prevailing economic conditions and competitive pressures in the UK property market.

There is also a view that the timing of the bid appears to be strategically aimed at taking advantage of Rightmove’s relatively low valuation, influenced by recent challenges in the UK property market. While this could be seen as a move to secure a favorable deal under current market conditions, it carries the risk that any attempt to increase the offer might negatively impact REA Group’s financial position and market perception. This situation creates uncertainty about whether the proposed acquisition will ultimately deliver the intended benefits to shareholders.

Future Steps for REA Group

REA Group now faces a critical decision: either increase its offer to tempt Rightmove’s board or walk away from the deal altogether. The company has until the end of September to decide under UK takeover regulations. Any move to sweeten the deal may require further equity raising or additional debt, which could affect REA Group’s credit profile and shareholder value.

While the strategic benefits of combining two market leaders in digital real estate are evident, the potential financial and market risks could outweigh the rewards if the acquisition price is not carefully managed. Investors and analysts will closely watch REA Group’s next steps as the deadline approaches.

  ASX, London Stock Exchange, REA Group, realestate.com.au, Rightmove, Rupert Murdoch