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Wall Street doesn’t see antitrust hurdles for Zillow’s Trulia acquisition

Deal would increase pricing power for combined entity

Wall Street Bear
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Zillow's (Z) deal to buy Trulia (TRLA) for $3.5 billion in stock will create a Goliath of online real estate listings and home values.

A survey of analysts, speaking off and on the record, showed that none had serious concerns about antitrust issues with the deal.

This general consensus comes even as the new entity that arises from the acquisition will certainly dominate online home listings – reportedly the two have a combined 137 million users.

Trulia and Zillow’s 84.6 million unique visitors in May 2014 account for twice the number of unique visitors for the next three real estate websites put together, according to the Beyond Syndication 2014 report from Clareity Consulting.

Zillow CEO Spencer Rascoff himself said in the call announcing the deal on Monday that he did not expect opposition from antitrust regulators to the acquisition.

Chris Merwin, an analyst at Barclays Capital who tracks Zillow, wrote in the days before the formal deal announcement his assessment of the deal, and didn’t mention any concerns.

“We believe a potential merger between the two companies could not only generate substantial cost synergies but also dramatically increase the combined entity’s pricing power with real estate agents,” Merwin wrote. “Trulia and Zillow are currently ramping up their marketing spend, with Zillow planning to spend $65M this year, and Trulia planning to spend about $45M. As a consolidated entity, we believe Z/TRLA could dramatically scale back that marketing spend and drive substantial margin expansion.”

Merwin did say that the acquisition would increase the pricing power of the newly minted powerhouse, but not inappropriately.

“Beyond cost savings, we believe that a merger would dramatically increase the pricing power of Z/TRLA. Currently, Z gets a monthly ARPU of $286 from its agents, while TRLA is a bit less at $196. By combing Zillow’s 83M MUUs with TRLAs 54M MUUs (both as of June), we believe agents would be even more compelled to spend marketing dollars on a platform that we estimate would have well in excess of 100M MAUs (assuming ~70% of Trulia’s traffic overlaps with Zillow’s). Also, a combined entity would have greater leverage to exert over local MLSs and could in turn enhance the data quality of its listings,” Merwin said. “If Zillow/Trulia were to one day become the de facto MLS, we believe a long-term ARPU of rougly $1,000 is achievable – more in line with online real estate portals like RightMove in the UK and REA Group in Australia, which have monthly ARPUs of £607 (or $913) and AUD$2,490 (or $2,310), respectively.”

Analysts and analyst reports from more than a half a dozen other Wall Street firms likewise, both on and off the record, raised no serious questions about antitrust issues, focusing primarily on the long-term strengths and weaknesses of the two firms, and whether the companies’ multiples showed long-term fiscal health.

Notably, previous acquisitions of large competitors by both Zillow and Trulia have faced no antitrust issues.

Trulia acquired Market Leader last spring. Zillow acquired both StreetEasy and the rental search website HotPads in the past two years.

Roscoff also noted Monday that residential real estate, as an industry, is fragmented and local, local, local.

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