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Zillow Drops on Secondary Offering News (revised)

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Stock prices of Internet software and services provider Zillow Inc. (Z) fell 7.1% to $84.74 at the closing bell on Aug 19, as the news of a secondary offering to fund a big-ticket acquisition caused a flutter in investor sentiment. The dip in stock price is particularly worth noting given the fact that the stock has more than tripled in the current year. Let’s dig deeper into the vagaries of the market.

The Acquisition

In order to thwart stiff competition from Trulia Inc. (TRLA) and other real-estate listings, Zillow had been ramping up its market presence through inorganic growth. In Dec 2012, the company acquired HotPads.com, a map-based rental housing and real estate search engine, for $16 million in cash. However, with a healthy recovery in the housing market in the U.S., Zillow looked to expand in urban markets like New York City, and the acquisition of NY-based StreetEasy fit the bill.

Zillow acquired search site StreetEasy for $50 million in cash. Since its inception in 2007, StreetEasy has offered users to view for-sale and for-rental apartment listings in the city. It provides a platform for resourceful information sharing among prospective customers. With about 1.2 million monthly unique visitors, StreetEasy has created a niche market for itself and has expanded to 34 employees into a new 6,500-square-foot office on Crosby Street in Manhattan’s Soho neighborhood.

Zillow is likely to utilize the sales team of StreetEasy to augment its advertising and subscription revenues that would otherwise have not been possible as a standalone company.

Secondary Offering

Zillow announced a secondary offering of over 5.02 million shares at $82 each. These included 2.5 million shares offered by Zillow and 2.52 million shares offered by some existing shareholders. The underwriters also have an option to purchase up to an additional 753,522 shares from Zillow.

The secondary offering is the second of its kind since its initial public offering in 2011. Citigroup, Inc. (C) is serving as the lead book-running manager for the transaction.

The Fall

Although the strategic purchase consolidates Zillow’s market position, it entails integration risks. Some industry experts believe the purchase price of StreetEasy is also on the high side.

Zillow has a Zacks Rank #3 (Hold), while another player in the industry, Brightcove, Inc. (BCOV) carries a Zacks Rank #2 (Buy).

(We are reissuing this article to correct some inaccuracies. The original article, issued Tuesday, Aug 20, 2013, should no longer be relied upon.)

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