The operator of the realestate.com.au website REA Group Limited (ASX: REA) this morning conceded that it would have to write off $180 million of the value of its collection of ex-iProperty online property assets across Asian markets.
This is a worrying admission for REA Group's management team that took a chance in paying around $750 million in total for the group after a series of staged investments that culminated in a full takeover offer at a substantial premium towards the end of 2015.
iProperty (formerly ASX: IPP) was formerly listed on the Australian stock exchange as part of a group of digital companies founded by Catcha Group entrepreneur Patrick Grove that also includes the still listed Asia-focused automobile classifieds business iCar Asia Ltd (ASX: ICQ).
For the quarter ending September 31 2015 iProperty reported revenues of just $8.6 million (slightly down on the prior quarter) with guidance for full year EBITDA of $3 million to $6 million to be met. It also stated that it expected to post full year revenues between $32.5 million to $36 million over 2015. In other words REA Group in total paid around 20x revenues for the business.
At the time REA Group was a 23% owner in the ASX-listed iProperty business and with its market value rapidly rising it made its move to take it out a couple of months later by putting up another $580 million on top of what it had already invested via a mixture of debt and existing cash reserves.
The offer price at the time represented a 29.4% premium to three-month volume weighted average price of iProperty shares to October 2015.
As a long-term iProperty shareholder at the time I was shocked at REA Group's largesse and expect iProperty's major shareholders were more than happy to take around $580 million for the remaining 77% of a business that was performing moderately at the time.
A year after the deal in November 2016 I wrote of my worries over it:
"One concern I have around REA Group is how its newly-acquired iProperty Group of businesses is performing as the latest update noted "excluding the impact of iProperty, we expect the rate of full year revenue growth to exceed the rate of cost growth".
REA Group coughed up around $750 million in total for iProperty on the basis of some big growth expectations and failure to justify the price tag could be a major drag on the share price in the years ahead."
The investment thesis behind iProperty was seemingly based much more on expectation than reality and now that expectation has failed to deliver it has come to hurt the group's management team and shareholder returns.
The management team at Carsales.com Ltd (ASX: CAR) has suffered similar FOMO-problems, with its investments in iCar Asia Ltd (ASX: ICQ) that now have a far lower on-market carrying value than what Carsales's management team invested at.
As such despite the attractive demographics and fast-growing middle classes of Asia it seems REA Group has a challenge on its hands to avoid more write downs to the value of its iProperty business.
Notably, the only Australian digital classifieds giant to have made a success of overseas replicas is SEEK Limited (ASX: SEK) with its booming Chinese doppelganger Zhaopin. It is consistently posting 20%+ revenue growth, but only because of the heavy reinvestment going into it to maintain its market-leading position.
Still given the track record of success of SEEK's management team in this space I would not bet against it having a market-crushing 5 to 10 years ahead.
In response to today's news of REA Group's overseas struggles its shares are down 2.6% to $66.19.
