Rightmove, as has been recognised for a couple of decades, boasts beautiful financial ratios. The company embodies the “winner takes all” rewards that can come with being the clear market leader in a field where the end-punters – in this case the UK’s property-seeking classes – are happy to trawl a single website rather than many.
Market share has been stable-ish at about 85%; likewise profit margins of 70%. Estate agents, though they grumble about paying Rightmove’s princely fees to advertise, generally cough up because the cost of not doing so can be higher.
Thus it is slightly odd that the company’s share price, before Monday’s 27% rise as REA Group, an Australian property listings company controlled Rupert Murdoch’s News Corp, expressed interest in making a bid, had gone roughly sideways for the past five years.
There are probably two reasons for that. First, the UK housing market has been lukewarm during the period of higher mortgage rates. Second, the next would-be challenger to Rightmove’s dominance looks better-funded than those in the past: US giant CoStar paid £100m for UK tiddler OnTheMarket last year as a launchpad for its ambition to “participate aggressively” in the property portal game across Europe.
REA’s possible £5bn-plus move on Rightmove therefore has something for everyone. Murdoch watchers can wonder if it means that Lachlan, the chosen one, is keener on property websites than newspapers. And is the medium-term destiny of NewsCorp to be split in two, liberating the 61%-owned REA and other property-based operations from the media assets, as one US activist fund called for last year?
Before we get to those deep waters, though, there’s a basic question: why should Rightmove play ball at a price REA can afford?
One theoretical answer would be to allow its shareholders to get out before CoStar makes mischief in the UK. Yet the competitive threat from that quarter may turn out to be overdone. So far, there’s been little real action. Knocking such a dominant leader off its perch still looks a challenge and a half. In the meantime, Rightmove is talking up its own opportunities in commercial property listings and mortgage arrangement. The City expects steady year-on-year profit improvement from last year’s £260m.
A successful offer, suggests Panmure Gordon’s analyst, would have to be pitched 60% above last week’s share price. That sounds about right. The London stock market may be a sleepy place these days but the locals are usually still sufficiently awake to spot an opportunistic approach when they see one. You don’t sell dominant market leaders cheaply.
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REA’s ability to make a knockout offer looks questionable. Even Monday’s tentative statement knocked 5% off its own share price, which is a problem for an offer that would include an equity element. Nor is there much scope for cost savings – a few shared technology costs maybe, but that’s about it given REA operates in Australia and Asia.
Add it all up, and Rightmove is in a strong position. Its relative undervaluation, compared with foreign peers such as REA itself, has been put in the spotlight. And it is under little pressure to sell for anything other than a silly price. Play hardball.