In 2000, Lachlan Murdoch listened to a pitch about a struggling online real estate business and he quickly came up with a plan to invest.
His family’s media company, News Corp., put A$10.7 million into REA Group Ltd., mostly in the form of advertising in their Australian newspapers. News Corp., which added to its position over the years, now holds a 61% stake worth nearly $6.8 billion.
The holding has become such a significant piece of News Corp.’s $10.8 billion overall market value that it’s complicating efforts by Lachlan and his father, Rupert, to merge the company with Fox Corp., another media business they control. The pair acknowledged in mid-October that they’d asked the boards of both companies to form special committees to explore a possible deal. While investors have weighed in from the sidelines since then, the companies have been tight-lipped about the process, and it’s unclear when the directors will make a decision.
At least three large News Corp. shareholders have come public in recent weeks, raising their concerns about a merger and citing the large chunk of value tied to the online real estate operations. In a letter last month to the committee considering a deal, investor Irenic Capital Management LP urged management to instead spin off its REA Group holding to News Corp. shareholders.
News Corp., Irenic said, is worth $34 a share, nearly twice its current $18.50, and a merger at the current price would undervalue other assets, such as book publisher HarperCollins and newspapers, including the Wall Street Journal. The investor called a spinoff of the online real estate businesses “the clearest and best path to unlocking News Corp’s value.”
Analysts have also flagged issues with valuation. Barclays Capital Inc.’s Kannan Venkateshwar said in a note after the merger was first proposed that both Fox and News Corp. trade at discounts to peers. “A recombination in itself is unlikely to solve this valuation problem for either company,” he wrote.
Spokespeople for News Corp., Fox and REA Group declined to comment.
REA, which is based in the Melbourne suburb of Richmond, is the largest player in the Australian online real estate industry. It promotes property listings, gives agents leads on buyers and has a mortgage arm. The company’s realestate.com.au website gets about 127 million monthly visits, three times those of its nearest competitor, REA said in a June investor presentation.
Real estate listings work differently in Australia than in the US, notes Siraj Ahmed, an analyst with Citigroup Inc. in Melbourne. In the US, agents distribute property information widely through local listing services, and agents pay online operators to advertise their names and for information about potential buyers. In Australia, REA manages its own listings, charging property owners a fee through their real estate agents to put the information on its websites.
While his office uses rival Domain.com and social media platforms, “it seems that REA have become market leaders with the public,” notes Jason Stepanow, an agent with the real estate brokerage Barry Plant Group in suburban Melbourne.
That’s helped the company generate some fat profit margins. In fiscal 2022, REA earned A$408 million (US$297 million) on sales of A$1.17 billion.
REA has recently been expanding into foreign markets, including India and Asia. The company also owns 20% of Move Inc., the US-based parent of Realtor.com and other related businesses. News Corp. owns the other 80%. Both companies have seen their businesses hurt by rising mortgage rates and the resulting slowdown in home sales. REA shares are down about 27% this year, while News Corp. is down 17%.
The Murdochs invested in REA initially as a hedge against the risk that real estate ads in their newspapers would decline with the growth of the internet. At the time, Lachlan Murdoch endured complaints from managers of the papers who didn’t want REA stealing their business, according to The Successor, a new biography of him.
Angus Aitken, of Aitken Mount Capital Partners in Sydney, puts the REA deal up with other big Murdoch family scores, including their founding of British satellite-TV giant Sky Ltd., which they sold to Comcast Corp. for about $39 billion in 2018. Aitken said in a recent investor note that spinning off the real estate business is a bad idea given its potential for growth.
“Why would you do it if you thought the value of REA was going up further over the next 5 to 10 years?” he wrote.
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