Property website Zillow to buy rival Trulia to cut costs
(Reuters) - Zillow Inc said it would buy smaller rival Trulia Inc for $3.5 billion, combining the top two U.S. real estate websites to cut costs, after they failed to produce profits from a rising number of home buyers shopping online.
The deal, which antitrust experts say is unlikely to face regulatory hurdles as there are very few barriers to enter the market, will enable the companies to cut heavy marketing costs that have seen both run up heavy losses.
The companies, rivals for nine years, said the all-stock deal would help save at least $100 million a year by 2016.
Between them, the companies spent $382 million in 2013, more than their revenue. Their combined loss was $30 million.
Trulia's shares jumped 20 percent to a high of $67.49, still well short of the offer, which values the company at $70.53 per share. Zillow's shares rose as much as 4 percent to $164.90.
Short-seller Citron Research, which has campaigned against Zillow for about two years, said the combined company would still be not big enough to stand up to the real estate industry.
Zillow and Trulia list properties for sale or rent on behalf of homeowners and real estate agents and generate revenue through subscriptions and advertising.
Zillow, known for estimated home values called "Zestimates", reported 83 million unique users in June, ranking above websites such as Buzzfeed and Pandora. Trulia had 54 million users.
Despite the dominance, Zillow played down antitrust risk to the deal.
"In internet media, the competition is only a click away so if the user doesn’t like the product they're experiencing, they can hit the back button and they can go somewhere else," Zillow Chief Executive Spencer Rascoff told Reuters TV.
Trulia's shareholders will receive 0.444 shares of Zillow for each share and will own about a third of the combined company after the deal.
"I think it was a little above what people were expecting but the opportunities are big enough that you can justify it," said Telsey Advisory Group analyst James Cakmak, who covers both Zillow and Trulia.
The U.S. online real estate advertising market is expected to grow 41 percent to $16.3 billion in 2015 from 2013, said market research firm Borrell Associates.
Tiger Global Management, Morgan Stanley and BlackRock Institutional Trust feature among the top 10 shareholders in both the companies.
TOO EASY TO COMPETE?
Citron claims Zillow's business model is unsustainable, saying it offers many agents rock bottom rates even as the agents plan their own rival site. (bit.ly/1rKDZVE)
Zillow has rejected Citron's claims and shares of both companies have been on a tear, leading to sky-high valuations as property advertising has moved to the Internet from newspapers.
Yet earnings have been slow to follow. Trulia's annual losses have widened even as revenue has nearly doubled every year since 2010. Zillow's revenue has grown only slightly slower.
Zillow shares should be valued at $15.53, based on analysts' earnings growth forecasts over the next decade, according to StarMine. That is about a tenth of the stock's market value.
Up to Friday's close, Zillow's shares had nearly doubled this year and Trulia's shares had gained about 60 percent.
An estimated 71 percent of potential U.S. homebuyers used one or both services, according to a recent survey by research firm ComScore, but the deal is seen passing antitrust scrutiny.
"People may be complaining because they're not technologically savvy but if they ask their 8- or 10-year old to help them they would be able to compete in the Internet as effectively as these companies," said Evan Stewart, an antitrust expert at Cohen & Gresser LLP.
Trulia's shares jumped as much as 40.5 percent to $57 on Thursday after Bloomberg first reported that Zillow may buy the company.
Zillow's shares closed up 1 percent at $160.32 on the Nasdaq, while Trulia ended up 15.4 percent at $65.04 on the New York Stock Exchange.
Goldman Sachs is the financial adviser and Shearman & Sterling LLP and Perkins Coie LLP is legal counsel to Zillow.
JP Morgan Securities and Qatalyst Partners are Trulia's advisers and Goodwin Procter LLP and Wilson Sonsini Goodrich & Rosati are its legal counsel.