The REA Group Ltd (ASX: REA) share price is under pressure on Wednesday morning.
In early trade, the property listings company's shares are down 2% to $198.55.
Why is the REA Group share price dropping?
The realestate.com.au operator's shares are under pressure today after it revealed that it has tabled a takeover offer for UK peer Rightmove (LSE: RMV).
According to the release, REA Group made a non-binding offer of 305 pence in cash and 0.0381 new REA shares on 5 September.
Based on the prevailing REA Group share price of $205.51 and current exchange rates, this implies a total offer value of 705 pence per share. This values Rightmove at GBP5.6 billion or $11 billion.
Management notes that this represents a 27% premium to Rightmove's undisturbed share price of 556 pence on 30 August 2024. It also equates to an enterprise value multiple of approximately 20.5x Rightmove's EBITDA for the twelve months ended 30 June 2024 of GBP272 million.
Under the terms of the proposal, Rightmove shareholders would end up holding approximately 18.6% of the combined group's issued share capital following completion of the proposed transaction.
The cash component of the proposal would be funded through third party debt and existing cash reserves. But given the strong growth and high cash generation of both businesses, management believes the enlarged group would be able to rapidly delever.
And to make things easier for existing Rightmove shareholders, REA would apply for a secondary listing on the London Stock Exchange. It notes that this would also provide the opportunity for a wider pool of investors to gain exposure to a global and diversified digital property company.
Offer rejected
Unfortunately for REA Group, the Rightmove board isn't biting.
REA was informed on 10 September that the Rightmove board has rejected the proposal.
No explanation was given for the rejection, but it seems that the board may believe that the proposal undervalues the UK company.
This is despite REA Group believing that its "proposal combines certainty of value, in cash, at a significant premium to recent trading while at the same time giving Rightmove shareholders the opportunity to benefit from the future value creation of the combined business."
Judging by the REA Group share price performance today, it seems that the market may now be concerned that the company will return with a higher offer to try and get a deal over the line.
Given that some analysts believe REA Group is already paying too much, it's not a surprise to see its shares dragged lower on this rejection.
