Domain Holdings Australia Ltd (ASX:DHG) share price up 9% on merger

The Domain Holdings Australia Ltd (ASX: DHG) share price is currently up 8.8% after Nine Entertainment Co Holdings Ltd (ASX: NEC) and Fairfax Media Limited (ASX: FXJ) announced that they would merge.

I think it is telling that the Nine share price is down 9.3% in response to this news whilst Fairfax is up 10.4%.

This is important for Domain for two reasons:

  • Fairfax still has a large 60% stake in Domain, so this will transfer the effective ownership to the combined entity.
  • One of the main reasons for the transactions, according to the market announcement, is that it combines Nine’s and Fairfax’s proven brand building capabilities to accelerate Domain’s growth profile.

One of the key tie-ups between Fairfax and Nine is linking Domain and The Block. Domain has already been a sponsor for The Block and it’s easy to imagine that there is a lot more that a combined entity can do to promote both Domain and The Block.

A main reason why REA Group Limited (ASX: REA) has been so successful is that it had the combined power of all the Australian media assets of News Corp (ASX: NWS) driving traffic to Domain could get a big boost from Nine’s assets linking to the property site.

Is Domain now a buy?

The main drawback that stopped me thinking Domain was a buy was the valuation. It’s currently trading at 30x FY19’s estimated earnings. This is cheaper than REA Group, which is trading at 34x FY19’s estimated earnings.

However, with REA Group you are buying the market leader which has a proven long-term record of growing revenue and earnings. It also several important investments in overseas markets in the US and Asia.

Domain is purely focused in the Australian market. Domain has a better growth trajectory than it did yesterday, however the increase of the share price by 9% has negated this benefit in the near future. I’d much rather invest in REA Group shares for the international growth at the current prices.

However, REA Group is also trading really expensively, so it might be better just to buy shares of these hot growth shares instead.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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