The online real estate advertising firm REA Group today announced that it entered into a scheme implementation agreement to buy Mortgage Choice for $244 million or $1.95 per share.
This represents a 66% premium to Mortgage Choice’s previous close and a 66% premium to Mortgage Choice’s one-month volume weighted average price.
The news saw MOC shares jump 62.5% at noon while REA’s share price was down 2.1%.
The bidding up of MOC shares today means the stock is currently up 33% YTD and up 225% over the last 12 months.
REA shares are down 2.9% today and down 7.8% YTD. However, the stock is still up 90% over the last 12 months.
REA bids for Mortgage Choice
REA is a digital property advertising business and operates popular Australian residential and commercial property websites like realestate.com.au, realcommercial.com.au and flatmates.com.au.
REA also owns the mortgage broking franchise group Smartline Home Loans.
Mortgage Choice helps customers source car loans, personal loans, credit cards, commercial loans, asset finance, and deposit bonds.
It has more than 500 brokers, 380 franchises across Australia, and over 30 lending partners.
Mortgage Choice has a loan book worth $54 billion and settlements of $11 billion in the 12 months to December 2020.
The mortgage broker reported net revenue of $22.2 million and net profit after tax of $4.1 million for the six months to December 2020.
According to Mortgage Choice Chairperson Vicki Allen, the proposed scheme ‘further establishes Mortgage Choice as one of the leading broking groups in Australia.’
In Allen’s view, the deal will enable Mortgage Choice to ‘operate at a greater scale with an improved service offering to brokers and their customers.’
She concluded that the announced scheme is a ‘very attractive offer for Mortgage Choice shareholders.’
REA’s proposed bid was unanimously recommended by Mortgage Choice directors subject to there being no superior counter-offer.
An independent expert report from Grant Thornton must also conclude that the proposal is in the shareholders’ best interests.
The proposed scheme is not subject to due diligence or financing conditions.
The scheme also permits the payment of an interim dividend of 4 cents per Mortgage Choice share, announced on 18 February.
Mortgage Choice shareholders can vote on the announced scheme at a court-convened shareholder meeting expected in mid-June.
How will REA finance the scheme?
REA expects to fund the transaction by increasing its syndicated debt facilities.
A syndicated loan is financing that is offered by a group of lenders — a syndicate.
Syndicated loans are usually used when the loaned sum is too large for any one lender. Syndicated debt facilities also allow lenders to spread the loan among each other, mitigating default risks.
REA expects its existing $170 million syndicated debt facility to be partially refinanced.
The company appointed Goldman Sachs as its financial advisor to assist with the transaction.
What does this deal mean for the REA and MOC share price ?
As the Sydney Morning Herald noted, REA’s proposed takeover is a further sign of consolidation in the mortgage broking sector that arranges nearly 60% of new home lending in Australia.
According to the Herald, brokers have been ‘under pressure to upgrade their technology systems in recent years, as fintech firms look to disrupt the lucrative financial services sector.’
Instead of feeling the pressure to upgrade its systems, Mortgage Choice could instead join forces with REA and leverage REA’s digital presence and audience.
And REA could leverage Mortgage Choice’s brand recognition and experience to expand its product offering beyond property listings and adverting.
As REA’s CEO Owen Wilson noted today:
‘The acquisition of Mortgage Choice represents an exciting opportunity for REA to create a leading broking business.
‘It builds on our success to date, accelerating our financial services strategy while leveraging our existing strengths and capabilities.’
This follows REA’s rival Domain recently partnering with buy now, pay later provider Limepay to launch a BNPL product, MarketNow, which allows real estate agencies to collect marketing costs upfront from owners when selling their property while vendors can defer payments.
As Domain CEO Jason Pellegrino told the Australian Financial Review in January, Domain’s partnership with Limepay is part of a broader strategy to expand its product offering to insurance and home loans, following partnerships with insurance firm Envest and home loan platform Lendi.
To survive, businesses must always look to innovate, change, and adapt.
Content to stay still, one risks being left behind by rivals hell-bent on moving forward.
REA’s proposed bid for Mortgage Choice is its way of seeking that forward motion.
But with rivals like Domain doing the same, investors will be watching closely how REA fares in its attempt to branch out.
With the likes of REA and Domain expanding and Australia’s housing market continuing to grow, I think you’d be well served to read our report on why the property market may be unlikely to crash until 2026 and how you can potentially capitalise on this trend.
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