Thank you for standing by, and welcome to the REA Group Acquisition of a Controlling Interest in Elara Technologies conference call. All participants are in the listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to turn the call over to Graham Curtin. Please go ahead.
Good morning, everyone, and thanks for joining us at short notice. This morning, you'll have seen our ASX announcement outlining that REA Group has entered into a binding agreement to increase its ownership interest in the Indian business Elara Technologies. I'm joined by Owen Wilson, our CEO, and Janelle Hopkins, our CFO, who'll provide an overview of our announcement as well as the structure of the transaction. We'll then have time for Q&A at the end of the session. I'd like to take this opportunity to remind everyone that we're currently in a blackout period and therefore can only discuss the transaction today. With that, I'll hand over to Owen.
Thanks, Graham, and good morning, everyone. Today, we're announcing an exciting opportunity for REA to expand our global footprint in the world's fastest-growing trillion-dollar economy. I'd like to jump straight into things, so can I turn your attention to the executive summary in the presentation, please? We're delighted to announce today that REA has entered into a binding agreement to increase our ownership interest in Elara Technologies. REA first invested in Elara in 2017 and currently holds a 13.5% shareholding in the company. On completion of the transaction, REA will move to a controlling interest with five out of nine board seats and a shareholding between 47.2%-61.1%. Total consideration for the transaction is expected to be in the range of $50 million-$70 million, payable through a combination of existing cash reserves and newly issued REA shares.
We've acquired this business at an attractive valuation, particularly given the long-term exciting growth prospects. Janelle's going to provide more detail on the structure of the transaction shortly. A key pillar of REA's long-term growth strategy is the expansion of our global footprint into large and growing markets. By increasing our ownership in Elara, REA gains greater exposure to one of the world's most attractive economies, which is forecast to deliver strong economic growth over the next decade. Elara operates India's fastest-growing digital real estate business in terms of audience. The business has a well-established, high-caliber management team with extensive experience across both the digital marketplace and real estate sectors. Its portfolio comprises property portals Housing.com and Makan.com and property brokerage PropTiger.com. The business has generated an impressive 42% revenue CAGR over the last three years, despite the impact of COVID-19 in Q4 this year.
It is very well positioned for future growth. The digital real estate market in India is forecast to achieve very high growth rates in the coming years, and there is currently no entrenched market leader. This transaction creates a unique opportunity to leverage the combined talent and expertise of REA and Elara to become the number one digital real estate business in India. Turning to Elara's portfolio in more detail, Elara has a differentiated offering in India, providing a full range of property services across digital advertising as well as delivering property brokerage services under the PropTiger brand. This offering provides an end-to-end service to consumers right throughout their property journey. Housing.com is India's fastest-growing real estate portal, offering premium digital property classifieds and a range of online property services, assisting consumers to buy, sell, rent, and finance property in India's top-tier cities.
Housing.com derives its revenue principally from listing fees and advertising subscriptions from real estate agents, developers, homeowners, and co-living operators. Makan.com also offers property classifieds with a broader reach across approximately 40 Indian cities. It operates as a complementary brand to Housing.com. PropTiger is a tech-led brokerage firm specializing in new residential properties. It provides access to thousands of verified properties on its site and offers traditional brokering agency sales, fulfillment services through its 300-strong sales force. PropTiger derives the bulk of its revenue through commission receipts from developers for properties sold. The similarities between our business models will enable capabilities to be shared going forward. In terms of size, Elara employs approximately 1,200 people across India, and last year, the business was placed amongst an elite group of 100 companies rated as a great place to work.
We know from our involvement with Elara over the past three years that it's a great cultural fit for REA. The next slide highlights the exciting market dynamics playing out in India. The country is forecast to deliver strong economic growth during the next decade of over 7% per annum. It has an increasing middle class and growing property ownership, and this is forecast to drive significant growth in the property market. With over 700 million internet users and roughly half a billion yet to come online, Elara is well placed to be at the forefront of the considerable long-term opportunities which will come from the digitization of the real estate sector. India's real estate market is significant, estimated at about $180 billion, with very strong growth forecast over the next decade.
While growing, the real estate advertising market remains fragmented with no entrenched market leader, neither digital property classifieds nor brokerage. This puts Elara in a fantastic position to build leadership over time, leveraging its unique assets and REA's proven expertise. Like many other countries around the world, COVID-19 has caused widespread disruption throughout India. This has driven a rapid shift to online technology and accelerated market acceptance for digital solutions in real estate. This continued online migration is expected to underpin high growth in both digital real estate advertising revenue and digital advertising penetration, as you can see on the bottom two charts. On slide six, you can see Elara is delivering strong audience growth and increasing market share at an aggregated portfolio level. The chart on the left highlights the performance of Elara's flagship site, Housing.com, which has delivered an audience CAGR of 45% since 2017.
While audience performance was hit during the depths of COVID, pleasingly, the positive momentum has returned, with September delivering new audience highs. On the right, you can see that Elara continues to increase its audience market share from 23% in 2017 to 31%, making it the number one player. I'd now like to hand over to Janelle to talk in more detail about Elara's financial performance and the transaction details.
Thanks, Owen, and good morning, everyone. Turning to slide seven, in addition to strong audience and market share growth, Elara has delivered outstanding revenue growth over the last three years, with a total revenue CAGR of 42% from FY2017 to FY2020. This positive trend continued in the nine months to March FY2020, driven by Housing.com's strong performance in particular. While the impact of COVID-19 in Q4 reduced Elara's FY2020 revenue growth, the company still delivered a resilient result, growing revenue by 9% to $27 million. While the extent and duration of the impact of COVID-19 on FY2021 revenue is uncertain, Elara is very well placed to return to growth post-COVID-19 and capitalize on the eventual market recovery. As you can see from the EBITDA profile, since FY2017, the business has been investing to support its strategy of audience growth and increasing market share.
In response to the impact of COVID-19, like we have done in Australia, Elara's management team has focused on strong cost management over the past six months. Reduced marketing and temporary reductions in staff salaries have offset some of the revenue impacts associated with COVID. EBITDA losses are expected in the medium term as we continue to drive towards market leadership. This slide also outlines the expected impact on REA's P&L in FY2021 from 100% consolidation of Elara's financial results, assuming a completion date of the 30th of November this year. While Elara's earning expectations are highly dependent on the impacts of COVID-19, we anticipate group revenue to increase between AUD 15 million and AUD 20 million, core operating EBITDA excluding associates to decrease between AUD 20 million and AUD 25 million, share of losses from associates to improve between AUD 3 million and AUD 5 million.
Shares on issue are expected to increase by approximately 200,000-450,000, and EPS is expected to be marginally dilutive and is dependent on the volume of remaining shareholder acceptances. As mentioned before, the FY2021 revenue and EBITDA ranges are indicative only given the ongoing market volatility created by COVID-19. Turning to slide eight, the easiest way to think about the transaction is to break it up into two stages. For stage one, REA has agreed to subscribe for $34.5 million worth of preference shares in Elara to fund the repayment of 50% of Elara's debt facility. This payment will be funded out of existing REA cash reserves. Separately, News Corp has agreed to subscribe for $34.5 million worth of preference shares in Elara to fund the remaining 50% of Elara's debt facility.
On repayment of the debt facility, Elara will have repaid all debt facilities currently in place. REA has also agreed to acquire the Elara shares held by the three largest shareholders after News Corp and REA, which makes up a combined 11.7% shareholding. This will be funded by approximately 199,000 newly issued REA shares with an estimated market value of AUD 23.9 million. Following stage one, REA's shareholding will increase from 13.5% to 47.2%, and REA will hold five out of nine Elara board seats representing control. As mentioned, News Corp shareholding will increase from 22.1% to 38.9%, and it will hold three board seats. The remaining board seat is held by Elara's CEO and founder. As part of stage two, REA will offer to acquire all remaining shares in Elara with the exception of News Corp shareholding.
If all the remaining shareholders accept REA's offer, REA will issue an estimated 249,000 additional shares with an estimated market value of AUD 29.9 million. Depending on the level of acceptance of REA's offer to acquire the remaining shares in Elara, when the transaction completes, REA is expected to hold between 47.2% and 61.1% with a total of five out of nine board seats. The maximum number of REA shares to be issued under the transaction structure is 449,000, with an estimated market value of AUD 53.8 million, assuming an REA share price of $120. The transaction remains subject to confirmatory due diligence and renegotiation of key management employment contracts. The following slide is an extension of the transaction details summarizing the funding split between the various components and the impact on shareholding and board seats.
As covered earlier, the transaction will be fully funded through existing cash reserves and newly issued REA shares, with a total estimated consideration between $50 million and $70 million or AUD 72 million and AUD 103 million, depending on the level of acceptance of REA's offer to acquire the remaining shares in Elara. This transaction is based on a value for the Elara business of $130 million. We view the current transaction as an excellent opportunity to move to a controlling ownership position at an attractive valuation. This represents a 6.9 FY20 sales to EV, which is at the lower end of comparable market multiples. While we clearly have sufficient cash on our balance sheet to undertake the transaction on an all-cash basis, we have decided to fund the transaction to maintain maximum flexibility for our balance sheet.
We will provide an update on the final ownership percentage and cash consideration upon completion of the transaction. I'll stop here. Operator, can we please now open the line for questions?
Thank you. At this time, if you'd like to ask a question, please press Star then One on your telephone and wait for your name to be announced. If you wish to cancel your request, please press Star then Two. If you're on the speakerphone, please pick up the handset to ask your question. Our first question is from Eric Choi of UBS. Please go ahead.
Hey, team. Just had a few things for the questions. First one, just wanted to ask about the catalysts for the transaction. I guess the RCF was due August 21, and it doesn't look like any defaults were triggered, but just wondering if that sort of event forced today's transaction, if you like. Second question, I guess it's been a while since REA's issued script. Can we just talk to the logic using shares as opposed to full cash? I guess if it's to align interest, maybe if you can refresh us on who those remaining shareholders are that you're taking out the stakes from.
Just the last one, it's kind of a long-winded mathy-type question, but if you gross the $4 million associate loss uplift up for your 16% stake, and for a full 12 months, it sort of suggests Elara would do a full year NPAT of about $43 million of loss. Is that right? If so, does it sort of suggest the transaction will reduce your 2021 NPAT by about $10 million? Don't know if I've got that right or not. Thanks.
I'll take the first one and then hand over to Janelle. In terms of the catalyst for the transaction, the maturity of the RCF in August next year really did not drive the transaction at all. We have used that as a mechanism to increase our stake. We had very favorable conversion terms in that RCF, including a discount on any valuation. Using the conversion of that as a mechanism to increase our stake was obviously very attractive to us. No, the real catalyst for this is our long-term view of this as a fantastic market and opportunity for REA. The reason, and I think I have been pretty consistent, is the reason we invested in this in the first place was the attractiveness of the market and the housing business. We came into this business when Housing.com was acquired as part of that transaction.
We have always had a desire to increase our ownership to higher levels. This seemed a very opportune time to do that. In terms of why script, I will hand over to Janelle.
Thanks, Owen. Look, we really decided to split the transaction between cash and script to enable us maximum flexibility. We clearly are in a very strong position from our balance sheet perspective with low debt, but it is a very small addition of free float, 0.2%-0.3%. We were comfortable with maintaining maximum flexibility on our balance sheet to take advantage of any future opportunity should they arise. The three shareholders that we are taking the 11.9% from are SAIF, SoftBank, and Excel. In relation to your NPAT question, I think the best way to think about it, Eric, is we have provided guidance around $20 million-$25 million EBITDA impact, and depreciation is around about $1 million. As we have flagged, the upside from the associates is between three and five.
Got it. Thanks, team. Thank you. Our next question is from Kate Hannon of Goldman Sachs. Please go ahead.
Morning, guys. Just three from me as well, please. Just following, Eric, on the financials. If we think about that revenue commentary you have made for the seven months, is it right to think about that as a $30 million full-year number for these guys, or is there any seasonality that we should be thinking about? Secondly, in terms of the cities that Housing.com is in, my understanding was it was really only in the five sort of main cities, which is below your competitors. I am just interested if you would update us around, are there still plans to expand outside of those five cities? The follow-on to that question is, how do we think about the incremental investment post this deal? Should we be thinking about a step-up in cost to expand the footprint across India? Cheers.
Okay, I'll take the first one. I think you can't just extrapolate the seven months to 12 months. There is seasonality involved and also, obviously, the impact of COVID, which is playing through in the first quarter, and it's uncertain as to the ongoing impact of COVID. I think the range we've provided is our best estimate at this point in time around the seven-month impact for the period of consolidation from December through to June.
I'll take the next two, Kane. In terms of the cities, you're right, housing in particular is in the main Indian cities, and Makan is in a much broader range of cities than that. We're quite up to about 40 cities. In terms of expansion of housing, I think our first priority is to gain market leadership in those main cities. I liken it to the Australian market. If you want to win in Melbourne and Sydney, we want to win in the Melbourne and Sydneys of India. If we own those markets, then obviously the next step would be to expand out to what they call the tier two cities in India. The main market's our first priority for housing.
In terms of cost to expand and to grow, there has been significant investment in this business, and you can see that from the EBITDA numbers that we showed in the graph in the presentation. We do not think there is a need to increase that level of expenditure, and we are very confident that any increased expenditure would be self-funded through growth in revenue over time. We feel pretty comfortable with the level of expenditure at the moment.
Perfect. Thanks, guys.
Thank you. Our next question is from Enzo Rakowski of Credit Suisse. Please go ahead.
Morning, Owen. Morning, Janelle. I've got three as well. Firstly, just wondering why the transaction is subject to confirmatory DD, particularly given that you've got an interest in Elara already, so you should have pretty good visibility on the asset, and just wondering whether there are any particular aspects that you still need to confirm around the operations. Secondly, on the cost front, you've obviously spoken about the investment plans, but wondering if that AUD 61 million of OPEX in FY2020, if you could give us a broad breakdown of how much was spent on product and tech, how much on marketing. Owen, I appreciate your comment that you think investment has been solid to date, but is there one area where perhaps you may need to put additional investment into within those buckets?
Finally, this is a question around, I guess, listing costs and market structure for Housing.com. Are you able to give us an idea of what is the average cost to list on the site at the moment? If you're thinking about the growth, do you see it as coming primarily from increasing penetration, or is there a pretty significant yield opportunity as well?
I might take one and three on DD and yield penetration, etc. Janelle, take the question on cost. Look, in terms of DD, that's why we're calling it confirmatory DD. We know the business incredibly well. There's no real need to do a commercial due diligence on this business. We've been inside the business from our kind of strategy and perspective for quite a while. Really, we've just got to cover off things like tax, some legal, the new management contracts, etc. We don't anticipate any issues arising from that, but until we've done that work, it has to be a condition precedent. In terms of the expansion of housing and the average pricing, it is a very low price. I don't know how well it's quoted, so I'm not going to quote the kind of average pricing, but it's very low.
I think you'll see over time probably more growth from penetration into the markets and from a switch from non-digital to digital, but there are great opportunities for yield. You can see that just in the way the property market is growing. Property values in places like Mumbai, they rank up there with Sydney. There is a huge yield opportunity in this market over time.
On the cost, Enzo, we're not going to give specific breakdown of the cost, but as you can imagine, it follows the same trend as RealEstate.com.au, where the bulk of the cost relates to salaries and staff costs, and then the next biggest cost base is around marketing and brand.
Yeah. In a market where there's no clear leader and it's quite fragmented, marketing is obviously a critical level of expenditure, and it's one that we want to maintain at the highest level we can while we try and build out that leadership position.
Okay, that's great. If I can just ask a follow-up, I mean, I'm just interested in those comments. Obviously, highly fragmented market. Do you see an opportunity for a clear leader to be established, or is there a risk that it continues to be highly competitive, obviously, given that market opportunity?
We'd like to think that with our expertise and this brand and these assets, we're clearly aiming for a market leadership position. The reason I keep highlighting it's fragmented and the race hasn't been won yet, it's still a nascent market at the end of the day. Someone is going to be number one, even in a highly competitive market. We intend for that to be us.
Okay, that's great. Thank you.
Thank you. A reminder to ask a question. Please press Star then One. Our next question is from Lucy Wang of Bank of America. Please go ahead.
Hi, good morning, Owen and Janelle. Thanks for taking questions. I just have three. Firstly, are you able to give us the split of revenue between Housing.com and PropTiger? I'm assuming Makan doesn't generate any revenue at the moment given its premium model. Secondly, just with Makan, it seems like you do have broader reach in India versus Housing.com. Is there a way to kind of monetize that reach in the interim, or do you think it'll still largely remain a freemium model for now and the focus is just to monetize the Housing.com platform? Lastly, I guess, how do you expect to, what edge will Elara have, I guess, in the market? How do you think you'll take share?
Is it mainly building that audience growth, or do you think there's some capability that Elara can invest in that'll help it stand out from the competitors? Thanks.
Thanks, Lucy. I'll take the first one. We're not providing a detailed split of revenue, but as a guide, Housing.com is the largest component of the revenue, followed then by PropTiger, and as you flagged, Makan is a very small component.
Look, in terms of Makan, it is a premium model. It does actually have revenue. It is very small, but it's a model where you kind of pay on sale effectively. So, reported sales it's a complicated algorithm, and the more sales you report to the portal, the higher up you come in the algorithm, but you pay on sale. It does have a small monetization. Look, longer term, whether we operate two brands or just put everything under the flagship brand, that's going to be obviously a strategic consideration. In terms of Housing's competitiveness, I think two things. If you look at the two other competitors, one still has a print business, and I would like to think digital can outsprint print in these markets. We've shown that previously. We operate a full-stack model in this market.
This is from kind of soup to nuts in terms of what you can do, and we're the only one who does that. That is a competitive advantage as well. As I said, I think there is a lot of value we can bring to this business with our capabilities, whether that is around apps, whether that is around SEO, whether that is around packaging, pricing, all of those things that have made us so successful here and in other markets we can bring to this business.
Wonderful. Thank you.
Thank you. Our next question is from Anthony Porto of Morgan Financial Limited. Please go ahead. Hi, Mr. Porto.
Sorry, can you hear me?
Yes, please go ahead.
Okay. Sorry, guys. You mentioned that India does look like one of the global markets that's still dominated by print. What is the size of the prize there? Can you just mention what is still classified as print versus kind of the size of the online classifieds market at the moment?
Yeah. Look, we don't think it's in the presentation. Sorry, let's get the numbers up. Look, digital real estate classifieds is running around about $76 million. You're right, it is still a very print-dominated market. India is still, I think, one of the only big markets in the world where print revenues are still growing. The migration to digital accelerated a lot in the last six months, but there's still a long way to go to that. I don't have a size number of the print market, sorry, but we have got an external forecast for digital real estate classifieds, which shows growth at about a 30% CAGR between now and 2025.
Can you share?
Yeah.
That's off penetration. You can come up with the types of numbers that we're talking about.
Yeah. No, thanks, Owen. I guess just the ownership structure, obviously, it's been quite fragmented. Has that hindered the strategic direction at all? Are there things that you'd look to implement pretty quickly that may have been hindered by the fact that you had to have so many, I guess, different owners agree?
That's a good question. I'd have to say the answer is probably yes. We had investors with different time horizons on the board of this company, and I think that did create a lack of clarity and direction for the business. We had financial investors that were clearly wanting to exit, having been in the business for quite a long time, versus ourselves and News Corp, which had a very long-term view on the opportunity in this market, and we're here for the very long term. I think cleaning up the register and giving management a much simpler ownership structure and day-to-day management structure and clarity of vision is going to be a positive for the business.
Yeah. Thanks, sir. Thank you. There are no further questions at this time. I'd like to hand the call back to Mr. Wilson for closing comments.
Great. Thank you. Thanks, everyone, for joining the call today at such short notice. I just want to close by reiterating how excited we are about increasing our ownership in Elara. The opportunity to create the number one digital business in India is a fantastic long-term growth prospect for our shareholders, and we are absolutely excited about it. We look forward to speaking to you again next Friday. It' s pretty close to when we announce our Q1 results, but for now, enjoy the rest of your day.
Thank you. That concludes today's call. You may now disconnect your lines.