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On Monday, Jefferies upgraded Rightmove (LSE:RMV) to ‘hold’ from ‘underperform’ and raised the price target to 720p from 450p, citing the potential for an offer following Australia’s REA Group's confirmation that it is evaluating a cash and share proposal for the property portal.
Jefferies attributed the increase in target price to a 30% premium over Rightmove’s undisturbed share price. The bank noted that while the strategic rationale for an acquisition might seem limited, the financial arguments are compelling. REA’s strong equity ratings and unleveraged balance sheet enhance the potential for free cash flow per share growth.
According to Jefferies, REA is a motivated buyer with a favorable negotiating stance. The bank’s merger analysis indicates that acquiring Rightmove could increase free cash flow per share up to an offer price exceeding 900p, assuming a cash funding of A$3.5 billion for pro-forma net debt/EBITDA of 2x. The final offer price is expected to be influenced by the need for the acquisition to demonstrate clear financial benefits, particularly in expanding margins and free cash flow conversion. Given Rightmove’s potential to drag on group growth and add earnings risks due to competition from CoStar in the UK, REA is likely to leverage these factors in negotiations.
Jefferies highlighted that News Corp, which holds a roughly 60% stake in REA and aims to increase its investments in property platforms, could drive the transaction to completion. The bank noted that a 30% premium would result in a valuation of 19 times earnings compared to peers at approximately 15 times, reflecting the elevated risk associated with Rightmove’s growth prospects.
The analysis suggested that Rightmove, facing challenges including a new CFO, strategic changes, and competition from CoStar, might attract a favorable view from its largely institutional shareholder base if an offer aligns with the proposed premium.
At 1310 BST, shares in Rightmove had risen by 1.6% to 664.80p.
