Rumours are floating around the market that News Corp is looking at buying out the other shareholders in the REA Group. While this may or may not be true, it is interesting to explore if this would make sense for News Corp.
News Corp, via its Australian entity News Limited, owns around 60% of the REA Group. They have been long term shareholder having originally invested just $10.25m in cash and contra for a 44% equity stake in 2001. That stake, along with other shares acquired through a failed buy out in 2003, the execution of options and participation in the dividend reinvestment plan, is now worth over $1bn on the News Corp books. (Not bad for a business that News didn’t really want to invest into in the first place!)
Buying out the minorities would make sense for News.
Clearly the REA Group is one of News’ best performing businesses in Australia – especially when compared to print. It would not be surprising to hear that the print assets News has in Australia are not doing as well as they did a few years ago. This is inevitable given the movement of ad spend from print to online – something has to give and the cost of print presses isn’t getting any cheaper.
The REA Group clearly has the capacity (if Rightmove is anything to go by) to spin off significantly more cash than it does today. As a comparison, the a REA Group generates a 45% EBITDA margin while Rightmove has a 65% EBITDA margin. Just applying that to the most recent annual numbers would put an additional $40m+ to the EBITDA line (sort of a proxy for cash).
In its current configuration, releasing much of this value might be hard. However as a full subsidiary of News Limited in Australia, a significant amount of cost could be stripped out, thus flowing to the bottom line and thus making the News Limited business in Australia look a whole lot better for the new CEO.
Being taken over by News Limited would also mean that the international expansion plans would be out the window as News Limiteds mandate seems to really only cover Australia (and perhaps NZ). Therefore the REA Group would probably quickly exit its investments in Italy, Hong Kong and Luxembourg – also leading to a higher EBITDA margin.
One also suspects that News might be looking for a way in which it can help string out the life of its print products. Bringing the REA Group and News Limited sales teams together could allow for cross selling (cross subsidising perhaps) of print advertising – much like Fairfax is doing with its Domain products (print and online). This can’t really be done when they don’t own 100% of the REA Group as it would destroy value for the minorities.
So perhaps there is some truth to these rumours.
Simon Baker is the former CEO and MD of the REA Group (2001 – 2008) and was responsible for News making the initial investment in the REA Group.