Shares of Zillow Inc. (Z) and Trulia Inc. (TRLA) gained over 8.2% and 9.8%, respectively, on Jan 23 on reports that the Federal Trade Commission (FTC) has approved the long pending merger of the two companies. However, the two leading online real estate information providing companies have not confirmed about the approval.
In July last year, Zillow had entered into an agreement to buy Trulia in a stock swap deal valued at $3.5 billion. Zillow in its latest filling with the Securities Exchange Commission revealed that it was expecting to complete the merger before Feb 15 if it got early approval from FTC. We believe that as Zillow and Trulia are the no. 1 and 2 online real estate information providers in the U.S., FTC took its time to assess the impact the transaction would have on market competition.
If the deal goes through, Zillow will not only strengthen its position but also dwarf competitors such as Brightcove Inc. (BCOV). Moreover, Zillow will have one fewer company to compete with.
The acquisition is also a strategic fit as both the companies offer mobile and web solutions that enable users to find important information about homes. It is worth noting that Zillow and Trulia drove 89% of the total traffic to the 15 most-visited real estate sites in Aug 2014 with unique visitors in excess of 92 million, per comScore.
Moreover, with Trulia in its portfolio, Zillow’s scale of business will increase manifold with new listings and expanded reach that will offer significant long-term benefits. Nonetheless, both the companies are in the high investment phase which makes profitability an issue. However, in view of Trulia’s over 100% year-over-year revenue increase in three out of the past four quarters, Zillow’s bid makes sense.
Another factor that might have prompted Zillow to go for the acquisition is improving home sales. Per the National Association of Realtors, U.S. existing home sales climbed above an annual pace of 5.04 million in Dec 2014. This was the sixth time in the last seven months when existing home sales saw a year-over-year increase of 5 million.
We believe that strong traffic growth, frequent product launches and a growing Premier Agent business are the positives for Zillow, going forward.
In particular, product launches like Zillow Real Estate and Zillow Digs App for Apple Inc.'s (AAPL) iPhone and iPad are positives. Continuing investments in marketing activities will also boost traffic going forward.
However, these investments may hurt margins of both companies in the near term. Moreover, Zillow only has $122.8 million in cash & cash equivalents and investments at the end of third-quarter 2014 and it needs to be seen how much cash it parts with for the acquisition.
Currently, Zillow carries a Zacks Rank #2 (Buy) while Trulia has a Zacks Rank #3 (Hold).
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