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Zillow Plummets with Stock Dilution for StreetEasy Buy

Zacks Equity Research

Stock prices of Internet software and services provider Zillow Inc. (Z) plummeted 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 investors’ sentiments. The dip in stock price is particularly worth noting given the fact that the stock has more than trebled 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 felt the incessant requirement to expand in urban markets like New York City and the acquisition of NY-based StreetEasy perfectly fitted the bill.

Zillow acquired search site StreetEasy for $50 million in cash. Since its inception in 2007, online real estate search engine 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. The strategic purchase also fortifies its position in one of the largest U.S. markets, the success of which could work wonders in strengthening national dominance.

Secondary Offering

In order to fund the transaction, 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, proceeds from which will not be accepted by it. 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 Plunge

The stock dilution has dent a hole in investor confidence as is evident from the fall in share prices. Although the strategic purchase consolidates its market position, it entails integration risks. Investors are also likely to be skeptical of Zillow’s acquisition binge. Furthermore, some industry experts believe the purchase price of StreetEasy is on the higher side and are apprehensive of the yields from a premium trade-off.

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

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