Rumours have been circulating for some time that the iProperty Group has not been performing to expectations and that the REA Group was under pressure to write down its investment.
On Thursday last week, the company announced a AUD $180m impairment charge against the asset, meaning that they had to write off AUD $180m of the amount that they paid for the iProperty Group.
Just to recap, in late 2015 the REA Group announced that it was acquiring the shares it didn’t own in the iProperty Group at AUD $4.00 per share, valuing the business at AUD $750m.
A quick look at the REA Group books shows that prior to the write down, they had AUD $702m of goodwill on their books relating to Asian investments. Therefore, the AUD $180m impairment of Goodwill is equal to approximately 25% of the carrying value and a strong indicator that they significantly overpaid for the asset.
In their market release, the REA Group attributes the write down to changes in market conditions. While this is likely to have been a strong contributor, many of the market conditions that exist today have been there for some time.
A brief look at the history of the REA Group’s management of international investments shows that management of these types of assets is very hard.
In 2007, the REA Group acquired casa.it, the market leader in Italy. However, over the next 5 years, Immobiliare (which was called eurecasa in 2007) captured and then surpassed casa.it to become the clear (and very profitable) market leader.
Analysis of the fall in casa.it showed that local entrepreneurial leadership is critical in these types of businesses – especially in markets where online classifieds are still emerging. Local leaders innately understand local issues and quickly adapt local operations to whatever is happening. This is doubly important in the online real estate game where practices in one country are often inappropriate for another country.
Corporatisation occurs when a large multinational takes over a local operation and applies corporate practices. This usually leads to local management focusing more on the corporate issues (compliance, reporting, internal targets, meetings) than on the real issues – the competitors, innovation, marketing and agility.
If we look at the iProperty Group, their growth can be attributed to the local entrepreneurial leadership of Georg Chmiel. Once the REA Group purchased the iProperty Group, he left the business and the inevitable corporatisation began. The same occurred in the Italian business.
So, while the change in market condition contributed to the business not performing to expectations, it is also highly likely that the change in leadership and being part of a multinational player also contributed to the change in business performance.
Simon Baker is the former CEO and MD of the REA Group and the former Chairman of the iProperty Group. He is the current Chairman of the Mitula Group and a serial investor in online classifieds businesses around the world.