News Corp’s Acquisition Of Move Inc. Will Diversify Its Digital Real Estate Assets

News Corporation‘s (NASDAQ:NWSA) digital real estate business has been trending well over the past few years. The company recently agreed to acquire Move Inc. for $950 million. ^[1] Move Inc. operates the Move Network of real estate websites, which capture more than 35 million monthly visitors and it is the third most trafficked website in the U.S. The acquisition will allow News Corp to diversify its digital real estate business, which is primarily in Australia.

News Corp’s digital real estate operations generated $374 million revenue in 2013. The estimated EBITDA margin of 45% translates into EBITDA of $170 million, representing more than 20% of News Corp’s overall EBITDA for 2013.

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Acquisition of Move Will Help News Corp Diversify Its Digital Real Estate Assets

News Corp’s digital real estate business stems from its 61.6% ownership of REA Group, which is a digital advertising business specializing in real estate services. It offers digital advertising solutions to help real estate agents sell or rent properties and win new listings. The company generates revenues from advertising. REA owns and operates Australia’s largest residential property website, realestate.com.au, and Australia’s largest commercial property site, realcommercial.com.au, which together have approximately 20.6 million desktop visits each month based on Nielsen average monthly total traffic ratings for the year ended June 30, 2013. ^[2] People looking to buy, sell or rent properties visit these websites.

Digital real estate revenues have been on an uptrend and increased from $266 million in 2007 to $374 million in 2013. ^[2] Going forward we expect it to continue to grow due to the popularity of the websites in Australia. Moreover, the company is aggressively eyeing more assets such as its investment in SEEK and iProperty, and now the acquisition of Move Inc., which will further aid the revenue growth. Accordingly, we estimate the Asia revenues to be north of $550 million by the end of our forecast period. An estimated EBITDA margin of 49% will translate into EBITDA of over $270 million by end of the decade. Adding the revenues of Move Inc. will take the segment revenues north of $850 million by end of the decade.

The revenue growth will primarily be driven the company’s assets in Australia, where the population has grown at an above average pace in the recent past and official projections show this is expected to continue. ^[3] Growth in Australia’s population is good news for real estate services. A higher demand will push more real estate listings and advertisement space on the company’s website. Growth in the population is reflected on the housing market, which is witnessing strong growth. Strong demand, short supply, a weaker Aussie dollar and record low borrowing costs are the main factors that are pushing the housing prices of Australian cities to a new high and real estate websites are benefiting from this surge. However, News Corp is not alone in the market and competition is increasing. While realestate.com.au is the biggest real estate website in Australia, other real estate services such as domain.com.au, reiwa.com.au, suburbview.com and homehound.com.au are gaining momentum. It thus makes sense for the company to diversify in other markets.

News Corp’s stake in iProperty was a step in right direction giving the company exposure to Asian countries. iProperty operates websites in Malaysia, Singapore,  Hong Kong, Indonesia, Macau, India and the Philippines. REA Group currently holds 17.22% stake in iProperty Group. Now the acquisition of Move Inc. will help News Corp diversify into the U.S., a lucrative market for advertising space. Move Inc. generated revenues of $227 million in 2013 and currently has a market capitalization of close to $900 million. The deal is expected to close towards the end of the year and would give News Corp an 80% stake in Move Inc., while REA Group controlling the rest. News Corp will pay $21 for each share of Move Inc., representing 37% premium to the closing price on Sep 29, 2014. ^[1]

We estimate revenues of around $8.8 billion for News Corp in 2014, with EPS of $0.51, which is in line with the market consensus of $0.45-$0.51, compiled by Thomson Reuters. We currently have a $18 price estimate for News Corp, which is more than 10% ahead of the current market price.

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1. News Corp To Acquire Move, Inc, News Corp’s Press Release, Sep 30, 2014 [↩] [↩]
2. News Corp’s SEC Filings [↩] [↩]
3. Population points to housing need, realestate.com.au [↩]