Investors are overreacting to the $2.7bn Domain takeover bid: Here is why

The $2.7bn Domain takeover bid stole the headlines today. Shares in Domain (predictably) surged from their $3.13 close the day before to match the $4.20 bid and more. Shares in major shareholder Nine Entertainment (ASX:NEC) increased as well, whilst shares in rival Rea Group (ASX:REA), which owns realestate.com.au, fell 10%.

The specifics of the Domain takeover bid

The bidder was Nasdaq-listed CoStar Group (NDQ:CSGP) a company that provides information, analytics, and online marketplace services – including online real estate market places. It made its mark by purchasing 16.9% of Domain shares at $4.20 per share. Domain has advised shareholders of the deal, but it has not made a call – it was assessing the proposal and would appoint advisers to help it.

Obviously there is no guarantee the proposal will result in a deal and the company warned it. Moreover, it was contingent to a number of factors including approval of the Foreign Investment Review Board (FIRB), due diligence, there being no material adverse change to Domain and execution of binding transaction documents.

It is no guarantee

This may seem a typical copy and paste from the company’s media and investor relation departments, but the deal could of course be called off if any of these fail to pass. The FIRB approval is the most important of them – it can kill deals and it has done so in the past.

One thing that seems to have been excluded is that it is subject to a shareholder vote. Seems a fait accompli doesn’t it – who wouldn’t accept sweet cash? The problem is, the company is 25% owned by Nine and it could kill off the bid by opposing it. Nine has put out a statement acknowledging the deal.

It simply said,’ Domain is of strategic importance to Nine’s media ecosystem and our long-term growth strategy’. ‘Nine will consider the proposal with a focus on the best interests of Nine shareholders’. Read into it what you will. It has not explicitly stated the direction it would take, just that it would consider it.

But will the board think ‘the best interests’ are to sell off an asset of strategic importance – and arguably the most important asset in the group. Yes Nine is diversifying into streaming, but it is an intensely competitive industry. Whereas Domain has an oligopoly with Rea Group.

We’ll watch this with interest.

Bad news for Rea Group?

As we alluded to above, Rea Group plunged 10% off the back of this news. If Domain becomes a part of a larger company, it could be bad news for Rea Group as it could fall behind. For the past several months, Rea Group has had a bid lead over Domain with a stronger profit and a far larger market capitalisation.

One way in which it could be good for Rea is that it would be the only stock left for investors wanting exposure to real estate classifieds and not willing to risk the farm on penny stocks. But Rea Group investors have cast that aside.

Remember when Afterpay got bought in mid-2021 and many of its ‘competitors’ raised because investors thought it’d be a boom for the sector? It turned out that it was bad for them because they’d never made a cent of profit, and their largest competitor was now part of a larger company.

Obviously this is a different situation where you have a smaller competitor being bought out by a larger one. While the threat of competition is greater with the money CoStar could chip in, Domain is starting from a long way back.

But of course, this is all subject to a binding offer being made and accepted by the shareholders. This hype could all come to nothing if Nine or the FIRB say no.

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips