REA Group Ltd (ASX: REA) shares have been having a tough time this month.
News that the ASX 200 stock is looking into the potential acquisition of UK peer Rightmove (LSE: RMV) has sent a number of investors to the exits.
One leading broker has been looking into the development and believes that it could have created a buying opportunity for investors is Bell Potter.
What is the broker saying about this ASX 200 stock?
Bell Potter believes that the potential acquisition would be "logical" and takes advantage of REA Group's expensive shares. It said:
RMV rallied 20% on the announcement (to A$10.4bn), perhaps implying a 69% probability of a 30% premium for the transaction. The deal appears logical at a headline level: using expensive REA equity to purchase cheap RMV equity (both comped to long term avgs), and is EPS accretive by 12% in FY26 on our base case scenario (of a 30% takeover premium, and 5% net synergies).
However, material value creation/reward against price/risk is hard to discern, outside of diversifying exposure to the UK property cycle showing "tentative" signs of recovery, given there appears to be little synergies from the cost base in a foreign marketing environment (i.e. agent paid in UK vs. vendor paid in Australia). We recognise potential to further leverage a significant equity base to create a diversified global proplistings network, pending combination.
Time to buy
In response to the news, the broker has retained its buy rating on the ASX 200 stock with an improved price target of $226.00 (from $223.00).
Based on the current REA share price of $204.66, this implies potential upside of 10.5% for investors over the next 12 months.
Overall, the broker sees a lot of positives from the potential deal and thus remains very positive on the realestate.com.au owner and operator. It concludes:
We make no changes to our recommendation or estimates, however our TP is increased to $226/sh due model roll forward. We recognise likely EPS upside on REA-RMV combination; we remain reserved on the risk profile until price/deal structure emerges. REA's market leadership position in its core Australian market is currently returning 30%+ on invested capital through a virtuous free cash flow/platform reinvestment cycle. Guidance for a return to the top end of its 7-9% range of capex/revenue likely signals positive expectations for operating conditions during FY25 at this stage.
