Shares in online property classified company REA Group have lifted as investors backed its $244m takeover play for broker Mortgage Choice.
Shares in online property classified company REA Group have lifted as investors backed its $244m takeover play for broker Mortgage Choice.

REA Group lifts on backing for Mortgage Choice deal

Shares in online property classified company REA Group have lifted as investors backed its $244m takeover play for broker Mortgage Choice as it forges deeper into financial services.

REA shares added 1.3 per cent to $139.22 as the market backed the deal's chances of being voted up at a May meeting of Mortgage Choice shareholders.

The move on the mortgage broker would be successful and represented a material premium to its fundamental valuation, according to Citi.

Citi analysts Brendan Sproules and Thomas Strong said the bid "arguably comes opportunistically when profitability has been hit by elevated repayments and a rebasing distribution network".

"Nevertheless, we believe this is factored into the high price to earnings ratio, and represents a substantial premium to our discounted cashflow-based valuation, where the strategy is not without risk," they said.

"We expect the all-cash deal to succeed given board support, in the absence of competing offers which we think are low."

REA unveiled its $1.95-a-share bid on Monday. The target business adds scale to its existing broker footprint and "also offers the opportunity to leverage REA's digital presence and its large property-seeking audience to harness lead generation," the Citi analysts said.

Rivals have also been bulking up. Online mortgage broker Lendi, which recently combined with Commonwealth Bank's Aussie Home Loans, has a partnership with REA competitor Domain.

The target's directors, who account for 12.7 per cent of the register, have indicated they will support the transaction. CBA holds a 16.5 per cent stake and Citi expects it would be a willing seller given its passive ownership and past intentions.

JPMorgan analyst Don Caducci said mortgage broker market share had risen to 59.4 per cent of mortgage origination, a lift from 52 per cent in March last year.

He said the deal was "continuing to support REA's focus on monetising a large digital customer base".

Mr Caducci said that given the market consolidation in broking, with AFG also merging with Connective in 2019 and Aussie merging with Lendi in late 2020, REA's scheme implementation agreement with Mortgage Choice was understandable at the price it was paying.

Mortgage Choice settlements in the first half were $6.1bn due to strong first homebuyer activity and increased refinancing.

However, an increase in run-off due to COVID-19 related savings and significant refinance activity in a low rate environment has offset strong settlement growth.

"REA's digital offering - sales insights, property data analytics - and customer lead generation ability provide greater opportunities for a mortgage broking business," Mr Caducci said.

"The acquisition is also complementary for REA's Smartline business, leading to further coverage/broker footprint."

Mortgage Choice is seen to be stronger on the east coast, while Smartline is stronger on the west coast.

Industry reports suggest AFG has a 20.7 per cent market share, followed by Aussie Home Loans at 11.3 per cent, and Mortgage Choice at 6.4 per cent. Other players are Loan Market Group at 5 per cent and REA's existing Smartline unit at 3 per cent.

Originally published as REA lifts on backing for deal


ECQ moves to wind up Costigan’s failed NQ First party

Premium Content ECQ moves to wind up Costigan’s failed NQ First party

The move came after the party failed to secure a single seat at last year’s...

New mum’s stunning return to Capras ranks

Premium Content New mum’s stunning return to Capras ranks

CQ sensation will hit the field at Browne Park for the team’s weekend clash with...

Paradise Lagoons Campdraft on this weekend

Premium Content Paradise Lagoons Campdraft on this weekend

The event schedule is slightly smaller this year due to COVID-19 restrictions on...