The owner of the UK’s number two property website, Zoopla Property Group (LSE: ZPLA), has purchased price comparison website uSwitch, in a £160m deal that puts it in direct competition with sector leader Moneysupermarket.Com Group (LSE: MONY).
uSwitch’s 2014 revenue of £62.9m is only a quarter of the £238.1m reported by Moneysupermarket.com last year, making uSwitch very much a number two player in this market.
That’s also a fair description of Zoopla’s share of the online property sector, versus market leader Rightmove (LSE: RMV).
Zoopla will now be a number two player in two big, profitable markets.
In this article, I’ll ask whether owning shares in Zoopla is likely to be more profitable than owning shares in Rightmove and Moneysupermarket.com, which are both top players in a single market?
A closer look
Zoopla’s purchase of uSwitch is a clear admission that it cannot unseat Rightmove, so is going to diversify, in order to try and stimulate growth and extend its relationship with its users.
Zoopla is also fighting a second problem: it lost 11% of its advertisers to new property portal OnTheMarket at the start of this year. The best way to stem this decline is to increase user numbers.
Buying uSwitch isn’t a bad idea: uSwitch claims to be the number one comparison site for energy and broadband, providing obvious cross-marketing opportunities with Zoopla’s property business.
However, uSwitch hasn’t come cheap. Zoopla’s purchase price of £160m equates to 9.9 times uSwitch’s 2014 earnings before interest, tax, depreciation and amortisation (EBITDA) of £16.2m, rising to 11.7 times EBITDA, if a £30m performance earn-out payment is triggered.
Zoopla will spend around £25m of its £31m net cash balance and open up a new £150m debt facility to pay for this deal, adding risk and cost to the business. The firm has promised to maintain its current dividend policy of paying out 35-45% of group profits, putting further pressure on cash generation.
Some risks
uSwitch’s revenue has grown at a compound average rate of 20% per year over the last three years, but this deal isn’t without risk, in my view.
uSwitch’s business has always been based around encouraging customers to switch energy supplier and receiving a commission payment in return.
I don’t see this as being the most attractive area of the price comparison market, as it’s a business model that could be vulnerable to politically-led regulatory restrictions, and to changing tariffs and marketing practices among the big utilities.
In contrast, Moneysupermarket.com makes most of its profits in the less regulated areas of personal finance and insurance.
My view
In my view, Zoopla’s property and price comparison assets are less attractive than those of Rightmove — whose 73% operating margin is twice that of Zoopla — and Moneysupermarket.com, which today confirmed it expects to meet full-year expectations of a 36% hike in earnings per share in 2015.
It’s often better to be the best at one thing than second best at several, and I believe this is the case here: in my view, both Rightmove and Moneysupermarket remain more attractive buys than Zoopla.
