Australian hedge fund bets $1 billon on Zillow-Trulia

“We believe Zillow will be a $50 billion enterprise value company”

One of Australia’s largest hedge funds is betting big on the future of online real estate in the U.S., to the tune of more than $1 billion. And if online real estate progresses as the hedge fund expects, its $1 billion could turn into $10 billion rather easily.

Caledonia Funds, an independent global investment manager with offices in Sydney and New York, disclosed that it currently owns nearly 20% of Zillow (Z) and more than 27% of Trulia (TRLA), which at the two companies current trading prices, makes Caledonia’s holdings worth more than $1.2 billion.

Recent filings by Zillow and Trulia with the Securities and Exchange Commission revealed Caldedonia’s interest in the two online real estate giants.

According to the SEC filings, Caledonia owns 6.85 million of Zillow’s 34.44 million outstanding shares, and owns 10.25 million of Trulia’s 37.8 million outstanding shares, making Caledonia’s interest in Zillow worth $724.81 million and its interest in Trulia worth $477.66 million.

According to a November article in Australian financial publication BRW, Caledonia’s $725 million investment in Zillow is the largest in the fund’s 22-year history, by a factor of three.

And according to the fund’s portfolio manager, Michael Messara, the fund’s investment is an incredibly safe bet.

“We have made the scale of the investment because we believe the opportunity is extraordinary,” Messara told a crowd of investors at the London version of the Ira Sohn conference, as reported by BRW. “We believe Zillow will be a $50 billion enterprise value company – around seven times the size it is today,”

For comparison, Zillow’s current market cap is approximately $3.65 billion.

But Caldedonia isn’t just betting big on Zillow, the company owns an even larger share of stock in Trulia, and stands to profit when the proposed $2.9 billion merger between Zillow and Trulia is finally completed.

While shareholders approved the deal recently, there were a few hold-ups from regulators, including several requests for information from the Federal Trade Commission to review any potential anti-trust violations.

Last month, the two companies stocks soared on news that FTC approval is expected soon.

According to the BRW report, Caledonia believes that the U.S. real estate market is trailing far behind Australia’s in terms of its transition to dependency on online real estate sources.

“It is not often that things play out in the U.S. last, especially online,” Messara said. “But that is certainly the case here. For us, it is a little like going back in time. We have seen this movie over and over and we know how it ends.”

Messara cited the potential for growth in agent advertising as a main reason for the fund’s big bet.

When the Zillow-Trulia deal was announced, Zillow CEO Spencer Rascoff strongly echoed that sentiment.

"Better agents make for better advertisers," Rascoff said, adding agents still spend on mailers and billboards, but the mobile revolution will likely drive them to either Zillow, Trulia or both.

The two companies’ combined revenue currently represents less than 4% of the estimated $12 billion real estate professionals spend on marketing their services to consumers each year, the companies said when the merger announcement was made.

And Zillow’s potential to capture that ad spend is driving Caledonia’s move, Messara said.

“So, we have a company with 72% of the home buyer audience but only 4% of the agent advertising spend, Messara said. “This is equivalent to a TV station with 72% ratings and only 4% ad share. Advertising dollars inevitably follow eyeballs across every medium, across every country.”

Only time will tell if Messara and Caledonia cash in on the big bet, but if their prediction proves true, it will make a whole lot of other investors very happy too.

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