May 11, 2018 / 11:12 AM / 6 months ago

Breakingviews - Zoopla lures new twist on classic UK property punt

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LONDON (Reuters Breakingviews) - Zoopla has enticed a new twist on a classic UK property punt. Silver Lake on Friday offered $3 billion for ZPG , owner of the property search firm. The U.S. buyout group’s bet mirrors that of the property speculators that use its target’s website. Leverage makes it look a better deal, but increases the risk if the market tanks.

Silver Lake’s offer values ZPG at 490 pence per share, a 31 percent premium to the Thursday closing price. The company’s largest shareholder Daily Mail and General Trust , which owns just under 30 percent of ZPG, is on board.

ZPG is a hodgepodge of small technology companies assembled over a decade of takeovers, chiefly comparison site uSwitch and property search firm PrimeLocation, as well as Zoopla. The property bit of its 245 million pounds of 2017 revenue comes mainly from estate agents paying Zoopla and PrimeLocation fees for listing homes and apartments.

At the offered valuation, there’s a way for Silver Lake to make a return. As things stand, analysts expect ZPG to make 311 million pounds of revenue in 2018, and 121 million pounds of EBITDA. Assume it uses 500 million pounds of debt for the acquisition of ZPG’s 2.3 billion pounds of enterprise value, and revenue grows at a 10 percent clip over the next five years. If it sold out at the same EV/EBITDA multiple after using 30 percent of EBITDA to pay down debt, the buyout group could almost double its money and generate a 14 percent internal rate of return, according to Breakingviews calculations.

It’s conceivable that Silver Lake could do better, given that when a customer buys or rents a property they might also switch their broadband or energy provider. There are two catches. Big technology companies like Google could replicate ZPG’s business model and steal customers. Worse, Halifax reported a 3 percent month-on-month decline in UK house prices for April. True, punters use Zoopla to find rental properties as well as buying opportunities. But when the housing market turns down, the best place to be is not leveraged at all.

Breakingviews

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