Monday, July 28, 2014

Zillow Bought Trulia Because 'the Stars Aligned'

NEW YORK (TheStreet) -- Zillow announced it is buying Trulia in a $3.5 billion in a stock-for-stock transaction that will allow Zillow to continue increasing its brand of online real estate assets, as both companies come from a "mutual position of strength," according to Zillow CEO Spencer Rascoff.

The Boards of Directors of both companies have approved the transaction, which is expected to close in 2015, with Trulia CEO Pete Flint remaining as Trulia CEO, and reporting to Rascoff, as well as joining the board of the combined company. The combined company, which does not have a name yet, will maintain both the Zillow and Trulia consumer brands.

Rascoff, who said he first approached Trulia about 6 weeks ago, said the deal was done now, as both companies are in a position of strength.

"Both companies are doing really well in terms of revenue and traffic," Rascoff said in an interview withTheStreet. "The Trulia board felt it was a very attractive deal for shareholders. We're both media brands, and [the deal] increases audience and reach. In terms of timing, the stars aligned."

The online real estate market is still an incredibly fragmented market, with an estimated $12 billion spent annually by real estate professionals marketing their services.

Rascoff noted the combined company would only have around 4% of total real estate professional advertising spending, so he did not expect there to be regulatory concerns about the deal, which is expected to close sometime in 2015.

"Trulia and Zillow have a shared mission and vision of empowering consumers while helping real estate agents, brokerages and franchisors benefit from technological innovation," Flint said in the press release. "By working together, we will be able to create even more value for home buyers, sellers, and renters, as well as create a robust marketing platform that will help our industry partners connect with potential clients and grow their businesses even more efficiently. Our two companies share complementary employee cultures with innovative, consumer-first philosophies and a deep commitment to create the best products and services for our industry partners."

Shares of Trulia were soaring on the back of the announcement, gaining 12.9% to $63.80, while Zillow shares were off 3.1% to $154.00 in premarket trading.

In a research note, Oppenheimer analyst Jason Helfstein said the fair value for the combined company would be approximately $150 a share, but that could be conservative. "By 2020, we see the combined company with ~70% of online real estate lead generation, reaching 60% EBITDA margins," Helfstein wrote in a note.

As part of the deal, Trulia shareholders will receive 0.444% shares of Zillow, and Trulia shareholders will own 33% of the company, with Zillow shareholders owning the rest.  Zillow co-founders Rich Barton and Lloyd Frink, who control a majority of the shareholder voting power of Zillow, have agreed to vote in favor of the transaction. Rascoff said that Barton "was in the heat of negotiations for the last six weeks on this."

Zillow, which has not yet reported second-quarter results, has continued to experience tremendous growth, reporting 83 million unique users across mobile devices and the web, while Trulia reported 54 million unique users for June. Though there is limited consumer overlap between the two companies, the transaction will have corporate cost savings, with $100 million in annualized expenses saved by 2016, according to management.

"It's very early days in this category," Rascoff said, when asked why investors would benefit from the deal. "It's a fragmented and immature category, and we have a long and exciting road ahead of us."

Written by Chris Ciaccia in New York