Rightmove, the UK property listings group, has rejected REA Group’s (ASX:REA) £5.6 billion ($A11.02 billion) cash and share offer.
REA shares were down nearly 3% after its statement to the ASX on Wednesday, which revealed the terms of the bid and its rejection (or rather, dismissal).
In its statement, REA Group disclosed that it had made a non-binding offer of 305 pence in cash and 0.0381 new REA shares to Rightmove on September 5.
Based on the prevailing REA Group share price of $205.51 and current exchange rates, this implied a total offer value of 705 pence per share.
Rightmove shares traded at around 670.80 pence on Tuesday before REA’s statement was released.
REA shares traded at around $US198 on Wednesday afternoon, so the fall reduced the value of the offer by about 3%.
REA stated that the bid represented a 27% premium to Rightmove’s undisturbed share price of 556 pence on August 30.
Under the terms of the proposal, Rightmove shareholders would hold approximately 18.6% of the combined group’s issued share capital following the completion of the proposed transaction.
The cash component of the proposal would be funded through third-party debt and existing cash reserves. However, REA claims that given the strong growth and high cash generation of both businesses, it believes the merged company would be able to rapidly deleverage and reduce debt.
To make things easier for existing Rightmove shareholders, REA would apply for a secondary listing on the London Stock Exchange. It notes that this would also provide an opportunity for a wider pool of investors to gain exposure to a global, diversified digital property company.
However, the dual listing is something that BHP eventually rejected, moving its primary listing back to Australia and, in doing so, saving millions of dollars in costs annually. Rio Tinto, on the other hand, maintains its dual listing in London and on the ASX.
What was interesting about the rejection was the lack of explanation from Rightmove.
REA stated it was informed on Tuesday (September 10) that the Rightmove board had rejected the proposal, and that was that.
A 100% cash offer might have been more attractive, or even a 50% cash/50% shares split.
The structure revealed on Wednesday seems designed to maintain News Corp’s (the Murdoch family’s) control over REA. More cash would require a placement to shareholders, forcing News Corp to contribute 61% of the cash to maintain its current stake.
The weakness in the REA share price suggests investors fear another offer. Last week, news of REA’s interest saw the shares dip 5% on the day. In reality, with the rejection by the UK group, REA shares should have risen.
The weakness in the REA share price also suggests it might have had to raise cash with a deeper discount than desired.