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Zillow Closes Trulia Buyout in a Stock-Swap Deal; Shares Up - Analyst Blog

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The much-awaited merger between the two leading online real estate information providing companies came to a close after Zillow Inc. (Z) announced the completion of the Trulia Inc. buyout. Shares of Zillow gained nearly 2.5% in yesterday’s trade, following the news.

Further, the company announced that it has changed its name to Zillow Group, Inc. but would continue to trade under the same ticker symbol “Z” and inherit the trading history of the original company.

Zillow acquired Trulia in a stock swap deal valued at approximately $2.5 billion, based on the closing price of Zillow stock on Feb 17, 2015. Per the contract, Zillow Group has paid 0.444 of its Class A common stock for each share of Trulia shares to shareholders. With this, Trulia shareholders now own nearly 33% of the combined company, while the rest remains with Zillow shareholders.

Subsequent to the acquisition, the companies eliminated approximately 350 positions as the combined company will work on integrating operations. Of these, 280 — in San Francisco and Bellevue, WA — were overlapping positions in sales and administration. Further, the company stated that 70 positions will be retrenched by the end of second-quarter 2015, leaving the combined entity with a workforce of nearly 2,000.

Zillow and Trulia had entered into the deal in July last year. Since then it was awaiting approval from the Federal Trade Commission (FTC) which was finally granted on Feb 13. We believe that the FTC took its time to assess the impact the transaction would have on market competition as the deal involved the top two online real estate information providers in the U.S.

The acquisition has strengthened Zillow’s competitive position versus MOVE, which was recently acquired by News Corp. (NWSA). Moreover, the deal helped Zillow to remove one of its competitors.

The acquisition is also a strategic fit as both the companies offer mobile and web solutions that offer important information about homes to users. Notably, Zillow and Trulia drove 89% of the total traffic to the 15 most-visited real estate sites in Aug 2014 with more than 92 million unique visitors, per comScore.

Moreover, with Trulia in its portfolio, Zillow’s scale of business will increase manifold with new listings and expanded reach, which in turn will offer significant long-term benefits. Nonetheless, both are in the high investment phase which makes profitability an issue. However, Trulia’s more than 100% year-over-year revenue increase in three out of the past four quarters justifies Zillow’s bid.

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 increased 2.4% to an annual pace of 5.04 million units in Dec 2014. This was the sixth time in the last seven months that 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 in the near term.

Currently, Zillow carries a Zacks Rank #3 (Hold). A better-ranked stock in the Internet Content industry space is LiveDeal Inc. (LIVE), carrying a Zacks rank #2 (Buy).


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