A Zillow (Z) Takeover by CoStar (CSGP) Would Be Considered a 'Homerun' as Company Builds Warchest
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CoStar Group, Inc. (NASDAQ: CSGP) announced earlier this week that in conjunction with its inclusion in the S&P 500 index it will be raising $750 million by selling common stock. The company stated that it expects to use the cash to “fund all or a portion of the costs of any strategic acquisitions.” This had Wall Street buzzing as the new funds can be added to the company's already nearly $4 billion cash hoard to position it to announce a large, transformational deal. Attention has turned to who that could be.
CoStar is a leading provider of online real estate marketplaces, information and analytics and already owns venerable online real estate properties including Ten-X, LoopNet, and Apartments.com. The company has dominated the non-residential side of the business and now analysts and investors expected the company to tackle the residential side, where it has already made some early moves with the acquisitions of Homesnap and Homes.com. Still, with residential only making up 3% of its revenue, there is a lot of wood to chop.
Stephens analyst John Campbell told StreetInsider.com, in an exclusive interview, that he sees four routes the company could go to build the residential side of its business. First, it could target traffic scale, second, it could target content, next it could target cross-sell services, and finally, it could target software/services.
In traffic, the company could acquire Realtor.com, which is owned by NewsCorp (NASDAQ: NWSA), and is currently the #2 real estate website for traffic. Another option, would be to acquire #1 real estate website Zillow (NASDAQ: Z) (NASDAQ: ZG). Campbell said that buying Zillow would be a “homerun” for CoStar, but there could be some antitrust issues. With a market cap of just $9 billion for Zillow, versus $29 billion for CoStar, the deal size would not be an issue, although the company might have to make it a cash and stock deal. Elsewhere in traffic, the company could acquire Redfin (NASDAQ: RDFN). One sticking point to a Redfin deal would be the fact that Redfin owns RentPath. CoStar tried to acquire RentPath in 2020 but was blocked by the FTC.
In content, CoStar could acquire Nextdoor (NYSE: KIND) which is a social media website for neighborhoods. “While this would likely help serve up plenty of traffic synergies, we think that the bigger get could be the unique, user-generated content that is generated on a daily basis,” Campbell commented on a possible Nextdoor deal. With a market cap of just $1.4 billion, however, a deal might not move the needle much for CoStar.
Next, CoStar could look at cross-sell services and new verticals. Porch (NASDAQ: PRCH), which is a broken-SPAC deal, could be another smaller option. Porch is a service designed to improve the moving process. Pacaso, a 2nd home ownership services/portal, could be another option in this vertical.
Lastly, in Software/Services CoStar could be a secondary bidder for Black Knight (NYSE: BKI). Black Knight is currently in a deal to be acquired by Intercontinental Exchange, Inc. (NYSE: ICE), but some see antitrust concerns de-railing the deal which could provide CoStar an opportunity. The merger spread on the BKI/ICE deal is a whopping 21.6%, suggesting Wall Street doesn’t see the deal going through. Further, Black Knight’s proxy filing showed there was a technology company that was interested in bidding for the company. Some think CoStar was the company in question. Black Knight would be a nice alternative to CoreLogic, Campbell said, which CoStar tried to buy multiple times. “While not direct resi plays, we continue to see the SaaS property management solution providers (Yardi, RealPage, AppFolio, Latch, SmartRent) as being in CSGP’s wheelhouse,” the analyst commented.
Overall, there are many routes CoStar could go but all signs point to it being in residential where the company is actively trying to grow revenue.
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