REA Group Acquisition of iProperties

This assignment is a case study analyzing REA Group's acquisition of iProperties. It involves answering several questions related to the acquisition's rationale, due diligence process, financial structure, potential quick wins, and the valuation of the deal. Students are asked to consider the acquisition from the perspectives of both REA Group and iProperties shareholders, evaluating the fairness of the offer price and the reliability of the independent expert's valuation. The analysis includes discussions of financial metrics, market share, and the risks and opportunities associated with the merger. The assignment demonstrates an understanding of mergers and acquisitions, financial analysis, and strategic decision-making in a business context.

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Section 1
Use only the information given in REA GROUP acquires iPROPERTIES case.
1) What do you think were the five major reasons REA Group decided to acquire the whole
of the equity of iProperties?
Answer:
The Reason behind the acquisition of the whole of the equity of iProperties are as follows:
a) As iProperty Group has strong presence in Southeast Asian markets like Hong Kong,
Indonesia, Thailand and Malaysia, with leading position in Singapore and Philippines.
The goal of REA Group to win the Southeast Asian market will be achieved.
b) Track record of strong growth long-term growth in key operating and financial metric
c) Highly attractive macroeconomic environment with strong growth prevalent across
the region
d) Collective recorded property sales outpacing Australia with average property prices in
some regions also ahead and growing strongly, a south east Asian market opportunity
derives it after the takeover.
e) Real estate advertising shifting online from offline real estate advertising.

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2) What do you think were the five most important issues that REA Group would have
pursued in its due diligence on iProperties?
Answer:
a) The future outcomes and projections have to be reviewed with proper standards as per
the AUASB and experts could have an better opinion on this;
b) The legal compliances should have been reviewed under the due diligence for future
litigation purpose;
c) The Information system is an core heart of this business, so the validity of its updated
system should be reviewed as an due diligence prospective;
d) Environment Due diligence should have been reviewed, prior to acquisition, as the
rules of the target company could have been different from the current REA groups
rules.
e) Personal Due diligence of the employees could have been reviewed by the experts, so
that the capabilities of the employees to work in the environment of the REA group
suits to the business and the employees.
f) The existing market share as per the previous balance sheet, could have been
reviewed with existing interest in the company performance;
Section 2
1. Outline REA Group’s approximate financial structure after paying for the acquisition.
Explain whether you think this position exposes the group to excessive risk.
Answer:
As per the Deloitte, Independent Expert’s Report, the following things have noted, post-
acquisition:

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a) REA holds a potential blocking stake with respect to any future potential offer if the
Proposed Scheme is not implemented
b) IPP is projected to experience significant revenue growth within the emerging
markets which it operates, in our view, the implied revenue multiple for IPP based on
FY2016 forecast revenue of 13.2x is not inconsistent with the average for online
classified ads of 11.3x.
c) To hold the share price of the company, will be the another challenge, as the faith of
IPP stakeholders and the REA has to be strongly built off and the operational and
financial strength should be immensely developed
d) To retain the market share of IPP in leading position, in compare to their competitors
will be then the next challenge;
So, I believe that after paying for the acquisition, the group has an excessive risk regarding to
retain the current market share and if they will not holds true then they could have blocked
their future potential offer.
2. Explain what you think would be the most likely ‘quick wins’ REA Group could achieve
after taking control of iProperties.
Answer:
After the acquisition the following are factors are most likely to achieve:
a) Real estate advertising shifting online from offline real estate advertising.
b) A huge revenue increasing impact from 50 % to 20% in Malaysia and Hongkong in
the period between F.Y. 2016 to F.Y. 2020 of IPP could provide the same synergy
effect to the REA property;

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c) Increase in market share from 91 % to 98% in coming years could lift the share of
REA limited in the same area too.
d) Thailand and Indonesia is expected to be achieved through a mixture of price
increases as well as growth in market share, will surely help the REA to absorb its
market in other segments too.
3. In total, REA Group paid $760 million for 100% of the equity of iProperties. The market
value of iProperties’ equity on announcement of the offer, based on the one month VWAP of
$3.33 per share, was $625 million. What do you think were the reasons for REA Group
paying this premium?
Answer:
As per the valuation report of the experts it has mentioned that this scheme is viable for REA
properties because the goal of the company is to acquire their lead in South Asian market, so
as IPP have a significant market share in that area and have an immense potential to develop
their revenue and share in coming years (as per the expert report), so this might be the reason
that though the share price of one month VWAP of $3.33 per share, was $625 million, but
paid $760 million for the acquisition.
Further, I believe that the potential cash flow of the IPP has been seen in increasing trend
since last financial years and also the share price has been increased since last period. So the
increasing financial interest and position is also a factor where the acquirer company have to
lend their proposal for better offer after considering the goodwill segment.

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Section 3
4. As a shareholder in iProperties, explain whether you consider the $4 per share cash offer
from REA Group an acceptable price for your shares (ignore the combination of cash and
shares offer).
Answer:
As per the experts opinion this acquisition is favourable from the point of view of IPP
investors and not the REA investors. So, as per their valuation the offer of $4 per share cash
offer from REA group is an acceptable price for my shares as for the following points:
a) The valuation of a share in IPP is range between 3.59 to 4.54 per share (as per the
sheet attached), so $4 is in between these range;
b) After applying the multiple crosscheck valuation support the outcome of the DCF
analysis, which further intend a verifiable of discount rate and terminal value, provide
reasonable report to support the valuation of the share,
c) IPP’s share price in the absence of the proposed scheme is likely to trade lower than
the consideration offered by REA.
5. To what extent do you believe that the Independent Expert’s implied multiples in its
crosscheck valuation support the outcome of their DCF analysis?
Answer:
As a valuation cross check, the independent experts have considered the EV/ revenue
multiples and EV/EBITDA multiples observed for comparable trading companies and recent
comparable transactions. Further the outcomes from such comparable trading companies and
recent comparable are as follows:

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a) The revenue multiple range implied between 13.2x to 16.8x
b) IPP’s involvement in relatively high GDP growth markets as opposed to many of the
comparable which are operating in more developed markets such as the USA,
Australia and New Zealand.
c) the comparable transactions involving providers of property classified ads have an
average historical revenue multiple of 6.3 times and an average historical EBITDA
multiple of 21.7 times
d) the comparable transactions involving providers of other classified ads have an
average historical revenue multiple of 11.3 times and an average historical EBITDA
multiple of 24.6 times
6. As a shareholder in iProperties, explain whether you would have preferred to receive the
offer of $4 per share cash or the offer of $1.20 per share cash plus 0.79 B class shares in
Rollco.
Answer: As per the Deloitte, Independent Expert’s Report, this acquisition is favourable from
the point of view of IPP investors and not the REA investors. So, as per their valuation the
offer of $4 per share cash offer or the offer of $1.20 per share cash plus 0.79 B class share in
Roll co. from REA group, I believe I will prefer the offer of $4 per share cash is an
acceptable price for my shares as for the following points:
a) The valuation of a share in IPP is range between 3.59 to 4.54 per share (as per the
sheet attached), so the offer price $4 price is between this range;
b) The offer of receiving the share of ROLLCO; could not be benefited since it has a
stake of only 13.1% of Bidco, which could have no further increasing potential to give
a good financial option, later to the shares;

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c) REA group will be focusing on increasing their share in the market and so the
financial strength will be increased, so they will not be either focusing on their other
associates rather, to opting out of by taking $4 per share, shall be an better option,
further can buy shares of REA for further investment purpose.