Major FTSE 100 property sales and rentals company Rightmove (LSE: RMV) has rejected a third and likely final offer from Australian outfit REA Group. On Wednesday (25 September) it turned down the £6.1bn offer despite it representing a 37% premium on the share price. According to reports, it felt the proposal “materially undervalues” the company.
REA Group is owned by Robert Murdoch’s NewsCorp and operates a similar business model to the UK business, providing an online property portal for renters and buyers in Australia. A successful merger in the UK could make it the largest company of its kind in the world.
But Rightmove seems set on sticking to its guns and remaining a solely UK-based enterprise.
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So where to from here?
The initial £5.6bn offer made in early September ramped the share price up by almost 30% to around 680p. It’s managed to hold that level through the month while negotiations took place. But will that hold if no further bid is offered?
It’s worth noting that the takeover bids haven’t attracted much attention from brokers. Berenberg put a Buy rating on the stock on 3 September but that’s all. Whereas six major capital management firms have short positions open on it.
On the face of things, there’s little to indicate that the company is valuable enough to confidently reject the offer. On the other hand, REA’s enthusiasm to buy it suggests there may be untapped value that isn’t immediately apparent.
Fundamentals
Currently, Rightmove doesn’t represent a massive investment opportunity in my opinion. Its forward price-to-earnings (P/E) ratio is quite high, at 25.5, and it only has a 1.37% dividend yield. Over the past five years, the share price has increased by 24.6%, representing an annualised return of only 4.5%.
A £10,000 investment at those figures would only grow to £13,000 in five years, with dividends reinvested. Not much to write home about. Buying and renting one of the company’s many listed properties would likely deliver higher returns.
The average 12-month price target for the stock is around 635p, representing a 7% decline from current levels. Revenue is forecast to keep climbing but earnings are only expected to increase 10% by 2026.
The argument for growth
One metric that’s very promising is future return on equity (ROE), which is expected to be 320% in three years. Moreover, return on capital employed (ROCE) is at 363%, up from 183% three years ago. Both of these metrics indicate a business that’s allocating its funds in an efficient and productive manner.
So I think the analyst’s forecasts may be a little pessimistic.
The new Labour government is pushing policies to build affordable housing and help first-time homebuyers. Should these policies materialise, it would likely give Rightmove a much-needed boost. And let’s not forget, REA still has until the end of September to make another offer. If the company accepts an even higher bid, I expect it would boost the share price up even further.
It’s certainly an interesting situation and Rightmove is a stock I’ll be keeping my eye on while further developments unfold.
