BREAKINGVIEWS-Rocket’s housing deal has foundational cracks
Rocket Companies is acquiring Redfin for nearly $2 billion in an all-stock deal, valuing Redfin at $12.50 per share, a significant premium. While Rocket anticipates $200 million in synergies from cost cuts and increased revenue, challenges remain due to high mortgage rates and Redfin's history of unprofitability. Rocket's shares dropped over 15% following the announcement, indicating investor skepticism about the deal's viability amidst a struggling housing market.
(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Jennifer Saba
NEW YORK, March 10 (Reuters Breakingviews) - Rocket Companies (RKT.N) is barreling forward. The financial technology company specializing in mortgage lending is buying digital real estate listings firm Redfin (RDFN.O) for almost $2 billion. The punchy premium pencils out when cost savings and promised revenue bumps are factored in. Yet, like hopeful buyers searching out their next rung on the housing ladder, investors should conduct some skeptical due diligence.
Founded by Cleveland Cavaliers basketball team owner Dan Gilbert, Rocket on Monday said it had agreed to purchase Redfin, a low-fee brokerage with a popular online portal, in an all-stock transaction. Valued at $12.50 per share on announcement, the hefty price is more than double where Redfin’s stock was trading on Friday.
Rocket’s brochure for selling the deal includes marketing-friendly phrases, including the hot topics of the moment: “artificial intelligence” and “data.” The idea is to create a welcoming environment for house hunters to do all their business, from searching for their next purchase to finding ways to finance it. It comes at a crucial moment for Rocket, which has extended fewer mortgage loans since interest rates spiked in 2022 and is searching for new growth. And Redfin is cheap compared to the recent past: at its peak in 2021, shares changed hands at over $90 apiece.
The most eye-catching aspect, though, is the promised synergies. Rocket is forecasting a chunky $200 million, made up of $140 million of cuts to administrative and marketing costs, as well as $60 million in juiced revenue from combining. Taxed at the standard rate of 21% and capitalized it represents nearly $1.6 billion in value, more than covering the roughly $1 billion premium. Moreover, the transaction values Redfin at 2 times this year’s expected revenue, according to LSEG. That’s well below competitor Zillow’s (ZG.O) multiple.
Yet there are cracks in this seemingly solid foundation. The promised cost reductions equate to roughly 40% of what Redfin spent on marketing and general expenses last year, setting an extremely high bar for tidying up a company that has never been profitable since its 2004 founding.
More problematic is the housing market itself. Mortgage rates are stubbornly high, hovering between 6% and 7% - nearly double where they were a decade ago. As a result, people are staying put rather than moving up. Existing home sales fell 4.9% in January from the previous month.
The market is doing its own appraising. Rocket’s shares fell over 15% on Monday. The list price for Redfin looks attractive on first blush, but this fixer-upper might require a little too much elbow grease.
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CONTEXT NEWS
Rocket Companies, a conglomerate including lender Rocket Mortgage as well as various other assets like home search platform Rocket Homes, said on March 10 it had agreed to buy digital real estate brokerage Redfin in an all-stock deal for $1.8 billion.
The transaction’s exchange ratio implies a price of $12.50 per share, a 115% premium to Redfin’s undisturbed stock price on March 7.
US home buyers are paying more to borrow
(Editing by Jonathan Guilford and Pranav Kiran)
