Recently the REA Group announced that it would be exiting the New Zealand market and that it had entered into an advertising deal with the remaining player, realestate.co.nz. However, in exiting the market, did the REA Group capture as much value as they could?
This entry does not to debate whether the REA Group should or should not have exited the New Zealand market. The question that arises is having made the decision to exit New Zealand, did they maximise shareholder value in the exit approach they took?
In looking at the REA Goup’s exit of New Zealand, it is important to look at the allrealestate.co.nz asset. As of August this year, the REA Groupl claimed that allrealestate.co.nz was the #2 player in the New Zealand market (source: REA Group Full Year Result). The site had:
- Between 200k and 250k unique browers per month (realestate.co.nz have between 250k and 300k per month) (Source: realestate.co.nz)
- 527 paying agents using the site (Source: REA Group Full Year Results)
- 41,000 listings (Source: REA Group Full Year Results)
- Revenues of atleast NZ$1m (based on estimated $200/month per agent + display advertising)
- An established team on the ground in New Zealand
The bottom line is that the allrealestate.co.nz asset appears to have some value.
When exiting a market, any business is faced with a number of options. They can sell the business to an existing player, they can sell to an interested (but not existing) player or they can close the business.
The first step would have been to find a buyer for the assets and the most logical place to look would have been the incumbent players – realestate.co.nz and trademe.co.nz.
- It would have been unlikely that trademe would acquire the asset as their model is different, they are already highly profitable in their core business and owned by Fairfax, the competitor of News International, major shareholders of the REA Group.
- The other incumbent acquirer could have been realestate.co.nz. This would have been unlikely also as their shareholders are the REINZ and key industry players, and it would have been hard for them to justify to their constituents raising the funds to acquire allrealestate.co.nz. However, given that they were happy to enter an advertising deal, they may have acquired the assets of allrealestate.co.nz for at least the present value of the expected future cash flow of the advertising spend – if not a bit more.
Therefore the other potential acquirers could have been Open2view (virtual tour provider), the New Zealand Herald (major traditional classifieds player) and software providers. There is no telling how much they may have paid for the asset however as it is being closed down, any price may have made a difference.
As a buyer appears not to have been found, they have decided to close the business. In doing so, they further entrenched realestate.co.nz to as the leading property portal in the NZ market.
- The site will increase subscribers as there were agents that advertised on allreaestate.co.nz and not realestate.co.nz.
- With the advertising deal they put in placed with the REA Group, they will increase the traffic to the site from around 280k UB’s per month to an estimated 400k+ UB’s per month.
- Of course with the increase in traffic will come an increase in leads and an increase in value for the advertisers.
- The increase in page impressions and the departure of allrealestate.co.nz creates a ready base of display advertising customers who could onto realestate.co.nz.
All of the above mean that realestate.co.nz is now in a position to increase its yields from its advertisers – much more easily than if allrealestate.co.nz had remained in the market.
Although there is an advertising deal in place, will this deal it truly reflect the value that the REA Group is giving to realestate.co.nz by exiting the market?
The author is shareholder in the REA Group and the ex-Managing Director.