Harimau Capital

PATRICK Grove (caricature) , the 40-year old co-founder, group chief executive officer and chairman of the Catcha group of companies, a Kuala Lumpur-based private investment firm, must surely feel vindicated that his RM900,000 bet on a little-known property portal back in 2007 has paid off big time.

REA Group Ltd, an Australian digital-advertising company, has offered to take the Sydney-listed property portal, now known as iProperty Group Ltd, private for A$4 per share. Shareholders have also been given the option of cash and shares, at A$1.20-a-share and 0.7 shares, in a private company that will have an indirect interest in iProperty.

How things have changed. After Grove bought the property portal from a Malaysian couple, he went around looking for investors and was rejected 74 times before getting an investor willing to pump in A$2mil into the nascent site for a 10% stake. iProperty is also the first of four companies that he has taken through the initial public offering (IPO) route, listing it in 2009 at 25 Australian cents. 

Based on the A$4 offer by REA, which has a 22.67% stake in the property portal, iProperty is valued at a total of A$750.8mil. The cost to REA to acquire all the shares it does not own will come to A$578mil. If Grove and his business partners, who together own a 16.70% stake in iProperty through Catcha Group Pte Ltd, is to take the all-cash offer, they will make a cool A$128mil.

Not bad for a guy who was on the brink of bankruptcy 15 years ago after he and his partners aborted the listing of Catcha.com on the Singapore Stock Exchange in the wake of the dotcom bubble. Grove made it to the Business Review Weekly’s Rich 200 list earier this year with an estimated wealth of A$286mil. He was previously on the Young Rich List with an estimated wealth of A$250mil.

The serial tech entrepreneur, an Australian born in Singapore with Malaysian permanent residency, has always had faith in the growth potential of South-East Asia, moving back to Singapore in the late 1990s after a two-and-a-half-year stint with Arthur Andersen. He now divides his time between Australia, Malaysia and Singapore.

The other companies that Grove has taken public include Ensogo Ltd (previously known as iBuy Group Ltd, a e-commerce site headquartered in Singapore, December 2013 Australian listing), iCar Asia Ltd (regional network of auto portals headquartered in Kuala Lumpur, September 2012 Australian listing) and Rev Asia Bhd (previously known as Catcha Media Bhd, online, publishing and events company headquartered in Kuala Lumpur, July 2011 listing).

Although cashing out must look tempting, he and his partners have decided to take the mix of cash and shares option in the private company, as they, like the Murdochs, Rupert and Lachlan, who control REA through New York City-based News Corp Ltd, both know the potential of digital ventures, especially in South-East Asia, with its population of 600 million.

In essence, since Catcha Group has elected to take the mix of shares and cash, it will hold a stake in a special purpose company called RollCo, which will then hold a minority interest in BidCo, the company in which iProperty shares will go into after the deal goes through. 

RollCo and REA will then enter into a shareholders’ agreement as shareholders in BidCo. Those iProperty shareholders who decide to take the mix of cash and shares will hold from 10.7% to not more than 20% of the issued shares of BidCo via RollCo.

Baillieu Holst Ltd analyst Nick Caley considers the cash offer as fair given that it capitalises the company at around A$750mil in comparison to its financial year ending Dec 31, 2015 guidance for revenue and earnings before interest, taxes, depreciation and amortisation (Ebitda) of A$32.5mil to A$36mil and Ebitda of A$3mil to A$6mil.

He says in a Nov 5 report that investors who take cash are looking at the valuation (offer represents a 22% premium to the discounted cash flow valuation of A$3.28, implying a 22% to 41% growth in iProperty’s revenue and Ebitda over the next decade) and removes risks of property cooling measures and other political risks related to governments in the region. 

Those who take the cash-and-shares option are looking at the potential for further valuation upside beyond the A$4 per share (RollCo shareholders have a put option over their shares as an exit mechanism up until mid-2018), aligning interests with REA that may accelerate iProperty’s existing business’ growth and providing a vehicle to further participate in corporate activity in the region.

REA owns realestate.com.au, and the deal will give it a presence in the growing South-East Asia market, where iProperty is considered one of the more successful property portals. Digital News Asia founder and CEO Karamjit Singh, who spoke to Grove earlier following the announcement of the takeover offer, tells StarBizWeek that the offer puts the region in focus as the digital space continues to grow on the heels of smartphone penetration.

“It clearly tells us that Rupert and his senior executives see value and growth potential in the region and the fact that the iProperty team will continue to run the operations says that whatever Patrick is doing, he is doing it right,” he says.

Karamjit, whose portal tracks news and trends in the digital sphere, says those who invest into digital startups in the region are not looking into the present but are looking 20 to 30 years down the road. “This is about dominating the market years down the road, the move by REA will make the region more visible and show that South-East Asia is definitely a hotspot for digital startups,” he points out.

Karamjit says the offer attracted by iProperty also says a lot about how Malaysia continues to be “the best place for digital startups” as the market is a good mix of middle- and lower-income earners. “Its a good bridge for the region unlike Singapore, which is a strange animal in this region because its already a developed market,” he adds. 

Although listed in Australia, iProperty is the market leader among Asian property portals, not just in its home region of South- East Asia but also in Hong Kong/Macau. Morgans Financial Ltd senior analyst Ivor Ries says in a report dated Augt 24 that online markets are at an early stage of development in the countries (Malaysia, Indonesia, Thailand, Hong Kong/Macau and Singapore) that iProperty is present. Malaysia contributes 62% of revenue.

Ries says this means that short-term volatility for revenue and earnings is unavoidable although three (Malaysia, Thailand and Hong Kong/Macau) of the five countries that the portal operates in is now profitable. 

Ries believes that given the roll-out of higher-margin products just commencing, the foundations of several years of strong earnings growth have been laid.