Jefferies upgrades Rightmove as REA group eyes £4.4bn takeover bid

Jefferies analysts have upgraded their guidance for Rightmove as they believe Australian real estate giant REA Group will probably make a formal offer for the British property platform.

Last week, Rupert Murdoch’s News Corp-backed REA said it is considering a £4.4bn cash and share offer for Rightmove, sending the latter’s shares up nearly 25 per cent. Rightmove has reportedly enlisted investment banks UBS and Morgan Stanley as advisers.

Brokerage firm Jefferies has today upgraded its rating on Rightmove from ‘underperform’ to ‘hold’, citing a “meaningful likelihood” that REA will follow through with its bid before the 30th September “put up or shut up” deadline.

It has also revised Rightmove’s price target to 720p, up from 450p. The London-listed stock is currently trading at around 664p.

Jefferies analysts said although there is “limited” industrial and strategic logic for REA to buy Rightmove, the financial appeal is “compelling” as REA’s premium equity and debt-free balance sheet, puts it in a prime position for a low-risk deal.

“The financial rationale appears stronger than the strategic case,” they wrote. “We still think Rightmove has structural challenges, but the price action tells a powerful story.”

REA’s News Corp owner, which holds a 60 per cent stake in REA, also makes a deal more likely. Despite a potential dilution of its holding to under half, News Corp has been publicly pressured by activist investor Starboard to increase exposure to property platforms as its core publishing business faces a number of pressures.

Rightmove’s board and shareholders might view a sale price of up to 900p per share as good for REA, Jefferies continued, though this price is higher than most other European competitors. If an offer is made with a 30 per cent premium, about 720p per share, it could still be attractive to shareholders.

Unlike some other analysts who have suggested a bidding war could for London’s most profitable firm could erupt, Jefferies downplayed the likelihood of counter-bidders, who might shy away due to growing competition in the tough UK market.

This includes the recent £99m acquisition of OnTheMarket by US property giant Costar, which has positioned itself as a competitor in the residential sector.

Costar’s entry is expected to gradually erode Rightmove’s market dominance, with Jefferies saying: “In our view, Rightmove’s absolute and relative platform utility has peaked. We expect this will gradually be exploited by CoStar through its acquisition of OnTheMarket.”

However, private companies like Axel Springer-owned AVIV might be interested and private equity firms may still consider the highly-profitable Rightmove a tempting target for a leveraged buy-out. Jeffereies suggested that Prosus, a large investor in online businesses, might also be a potential bidder.