Jefferies upgrades Rightmove, says offer from REA Group 'probable'
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16:35 16/09/24
Jefferies upgraded Rightmove on Monday to ‘hold’ from ‘underperform’ and lifted the price target to 720p from 450p as it said an offer was "probable" after Australia’s REA Group confirmed it was considering a possible cash and share offer for the property portal.
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Jefferies said the target price increase was based on a 30% premium to the undisturbed Rightmove share price.
The bank said the industrial and strategic logic looks limited but upon inspection the financial logic of an acquisition is "compelling". It said REA's highly rated equity and unlevered balance sheet are the cornerstones of free cash flow per share accretion.
"REA is a motivated buyer with a strong negotiating position," it said. "Our merger analysis suggests that an acquisition of Rightmove is accretive to FY Jun-26 (the first full-year post completion) free cash flow per share up to an offer price of over 900p (assuming cash funding of A$3.5bn for pro-forma net debt / EBITDA of 2x).
"The actual level of an offer will be capped by the need for the acquisition narrative to be focused on this accretion alongside margin/FCF conversion expansion, given Rightmove drags group growth and adds earnings risk (from the CoStar threat in the UK, something REA will probably seek to exploit through negotiations)."
Jefferies said that given its circa 60% controlling stake and ambitions to increase capital deployed in property platforms, News Corp - the majority owner of REA - can drive a transaction to completion.
"A 30% premium gives REA accretion and equates to 19x versus peers at circa 15x, with Rightmove standalone facing risks," the bank said.
"Rightmove has the lowest growth and highest earnings risk of any name in EU online classifieds. For this reason, and others, we see the probability of counter bidders emerging as relatively low."
It said a typical 30% premium to the undisturbed price would give around 720p per share, a level that puts Rightmove on a "respectable, but modest" premium to peers.
"Considering the range of challenges within (new CFO, new strategy, execution on strategic growth areas) and without (again, CoStar's competitive threat), its largely institutional investor shareholder base might view an offer in that region favourably."
At 1310 BST, Rightmove shares were up 1.6% at 664.80p.