Murdoch leaves Rightmove little room for error
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, Oct 1 (Reuters Breakingviews) -When a buyer withdraws an inadequate offer for a house, the seller will typically feel a mixture of relief and anxiety. That’s where Rightmove’s RMV.L board may currently be at. On the one hand, the UK property portal just fended off four unwanted bids by Rupert Murdoch’s REA Group REA.AX, which is now out of the game for six months. On the other, rejecting an offer at a 40% premium places a lot of confidence in CEO Johan Svanstrom’s ability to achieve that sort of valuation on his own.
Rightmove’s board has some grounds to feel vindicated. It was clearly unimpressed that REA wanted to pay mostly with shares that traded on a foreign exchange, at a tangibly richer valuation that could have declined post-deal. Indeed, REA shares were off nearly 10% in September, perhaps because investors feared it would need to raise considerable debt for the purchase.
Moreover, Svanstrom already has a plan to hike his valuation. At its investor day last November, Rightmove set a goal to grow its top line to 600 million pounds ($823 million) by 2028, up from 364 million pounds in 2023. That implies a compound annual growth rate of 11%. If Svanstrom can do so, and maintain his current 75% EBITDA margin, the company would deserve to trade around 780 pence per share – REA’s last implied offer price – amounting to an enterprise value of 6.1 billion pounds. That’s based on Breakingviews calculations that put Rightmove’s implied 450 million pounds of EBITDA in 2028 on the same 13.5 times multiple Visible Alpha has that year for its closest comparable, UK-listed Auto Trader AUTOA.L.
Yet it’s not obvious that Rightmove can pull that off. Analyst forecasts compiled by LSEG expect its revenue to grow 9% in 2025 and 10% in 2026. More importantly, a big chunk of the additional revenue growth would hinge on developing new “adjacencies” such as mortgages, commercial real estate and data services. These are untested new territories and require R&D and spending on talent and technology that could erode profitability. Meanwhile, competition from the likes of CoStar-backed OnTheMarket will make it harder to maintain current margins.
At 613 pence, Rightmove is 20% below REA’s last implied offer price. If competition causes its EBITDA margin to drop to 70%, Svanstrom would have to grow sales by at least 14% a year consecutively through 2026 to justify REA’s offer on its own terms. Rightmove might be hoping that UK interest rate cuts will drive a higher valuation. But hope is not a strategy.
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CONTEXT NEWS
Rightmove said on Sept. 30 that its board had unanimously rejected REA Group’s fourth proposal, saying the offer remained unattractive and continued to materially undervalue Rightmove and its future prospects.
REA had offered 346 pence in cash and 0.0417 new REA shares, which implies an offer value of 780 pence based on the closing price of REA on Sept. 30.
The company has also declined requests from REA to grant due diligence access and extend the “put up or shut up” deadline on Sept. 30.
REA confirmed later on Sept. 30 that it does not intend to make a formal offer for Rightmove.
Rightmove shares traded down 8.3% to 613.4 pence on Sept. 30.
Graphic: Recent share price performances of Rightmove and REA https://reut.rs/3TSwDS1
Editing by George Hay and Oliver Taslic
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