Somehow, News Corp’s 61% subsidiary, REA Group (ASX:REA), doesn’t quite understand that takeover targets are under no obligation to engage with an indicative bidder. They can simply close the door, hang up the phone, or ignore emails if they don’t wish to engage.
REA’s reaction to being continuously ignored by Rightmove, its UK property listings counterpart, has become somewhat amusing.
Soon, someone might start stamping their feet and leak to News Corp media outlets about how terribly unfair it is for Rightmove to continue ignoring the proposed bid.
REA and its major shareholder should take a cue from BHP’s experience with Anglo American earlier this year. BHP, after being rebuffed, was forced to launch a bid without any engagement, only to be told by Anglo, “go away.”
BHP did go away, although the six-month deadline preventing any new bids doesn’t expire until next month.
On Monday, REA confirmed news that had already surfaced in London on Friday night, our time, that it had raised its non-binding offer for Rightmove to 770 pence per share, equating to around £6 billion ($A11.9 billion).
This is approximately $A600 million more than the first rejected 'indicative' offer earlier this month, which received short shrift from Rightmove.
On Monday, REA’s CEO, Owen Wilson, complained about the lack of engagement from Rightmove’s board.
“We live in a world of intensifying competition, and this proposed transaction would bring together two highly complementary digital property businesses for investment and growth,” Wilson said.
“We are genuinely disappointed by the lack of engagement from Rightmove’s board, and we strongly encourage them to engage with us.”
The reality, however, is that Rightmove’s board would likely be ousted, as its shareholders would only own around 20% of the merged company.
Despite claims, there are no competitive advantages for Rightmove to be owned by REA. After all, REA abandoned the UK market in 2007 without revealing the costs of that move.
If REA truly saw a competitive opportunity, it could return to the UK and start a competing service. However, that would be too expensive, and these days, senior management and board remuneration depends heavily on instant success, with little regard for long-term investments. Losses from struggling ventures can be quite damaging to their personal wealth.
REA has until the end of the month to make a formal offer for Rightmove or abandon its pursuit, as dictated by UK takeover rules informally known as “put up or shut up” (PUSU).
Perhaps analysts at E&P Capital have provided some insight into why REA is frustrated by Rightmove’s refusal to engage.
E&P estimates that, at the new price (and possibly higher), REA would need to raise capital from shareholders to increase the cash component of the offer.
E&P Capital noted that the higher offer of 770 pence per Rightmove share represents around a 35% premium to Rightmove’s undisturbed share price.
At this premium, analysts estimate that around $720 million in equity raising would be required to ensure that News Corp’s ownership doesn’t fall below 50%, and to keep the leverage ratio (debt to EBITDA) for the merged entity from exceeding three times, which is considered high.
News Corp could easily fund a higher offer for more REA shares. It has over $US1 billion in cash on hand and access to a large banking facility. However, it is also trying to offload Foxtel, which owes News more than $A900 million in debt and is also indebted to its 35% shareholder, Telstra, which is being repaid through a carriage deal on Telstra’s old HFC cable system.
