$578m buyout gets big tick from independent report

The potential gains from REA Group’s acquisition of iProperty Group far outweigh the risks, according to an investment analyst.

Morningstar said in a research note that REA Group could grow “significantly” if its international expansion plans succeed.

Morningstar also said the planned acquisition would be unlikely to damage REA Group’s balance sheet, despite the size of the deal.

REA Group will invest $578 million to buy iProperty’s collection of Asian property portals, and will fund the deal through a mixture of cash and debt.

According to the research note, REA Group should be able to rapidly retire this debt given its robust cash flow and low capital expenditure requirements – especially as iProperty has just started generating a positive operating cash flow.

“This is a critical inflexion point, which is usually followed by substantial earnings leverage, if iProperty can maintain its leading positions in the fast-growing markets of Malaysia, Hong Kong, Thailand and Indonesia,” Morningstar said.

“This is where REA Group’s operating knowledge and financial muscle will be of great value. They will assist iProperty in developing a network effect, a precursor to establishing a moat around the Asian real estate portals and fortifying a new growth avenue for REA Group outside Australia.”

REA Group said in a recent trading update that the acquisition would mark a “significant step forward in our strategy to become a truly multinational Australian business”.

Malaysia-based iProperty owns the market-leading portals in Malaysia, Thailand, Indonesia and the Hong Kong region, as well as a leading portal in Singapore.

The deal values iProperty at $751 million, although REA Group would only pay $578 million as it already owns 22.67 per cent of the company.

The acquisition is expected to be completed during the first quarter of 2016.

[Related: REA Group posts $210.2m annual profit]

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