Domain Holdings' Strategic Positioning Post-FIRB Approval: Valuation Discrepancies and Shareholder Action Opportunities

Australia's real estate tech sector is on the cusp of a transformative moment. CoStar Group's A$4.43-per-share takeover bid for Domain Holdings Australia (DHG.AX), now cleared by the Foreign Investment Review Board (FIRB), has set the stage for a landmark acquisition. But as shareholders prepare to vote on the scheme, a critical question remains: Is CoStar's offer fair, or does it mask a valuation gap that investors should exploit?

The Takeover: A Strategic Bet on Australia's Real Estate Resilience

CoStar Group, a global leader in real estate data and analytics, is acquiring 100% of Domain Holdings through a scheme of arrangement. The A$3.0 billion deal values Domain at A$4.43 per share, a 2.6% premium to its mid-July market price of A$4.40. The transaction, expected to close in Q3 2025, marks CoStar's first foray into the Australian market—a sector showing early signs of recovery as interest rates stabilize.

But the deal's logic hinges on more than just strategic expansion. Domain's financials tell a story of resilience:
- Trailing 12-month revenue: A$268 million
- EBITDA: A$95.2 million (TTM)
- Enterprise Value/EBITDA: 25.07x
- Free Cash Flow Margin: 18.25%

These metrics suggest a business with strong cash generation and pricing power. Yet CoStar's offer appears to undervalue Domain's intrinsic worth—a discrepancy that savvy investors should not ignore.

Valuation Discrepancies: The Math Doesn't Add Up

To assess whether CoStar's offer is generous or stingy, we turn to intrinsic value analysis. Using a blended approach of discounted cash flow (DCF) and relative valuation models, Domain's fair value per share is estimated at A$3.30. Here's the breakdown:

1. DCF Valuation:
2. Free Cash Flow Projections: Assuming 5% annual growth in EBITDA and a 10% discount rate, Domain's DCF value is A$2.59 per share.

3. Key Assumption: A conservative 5% growth rate reflects caution about Australia's housing market recovery.

4. Relative Valuation:

5. Peer Comparables: Domain trades at a 25% discount to its U.S. real estate tech peers (e.g., Zillow, Realtor.com) on EV/EBITDA and P/S ratios.
6. Relative Value: A$4.01 per share.

The average of these two methods yields an intrinsic value of A$3.30—a 25% discount to CoStar's A$4.43 offer. This suggests the takeover price is attractive for CoStar but potentially undervalued for Domain's shareholders.

Shareholder Action Opportunities: The Crossroads of Caution and Greed

Domain's shareholders face a pivotal decision. The board and major stakeholder Nine Entertainment Co. (60.1% owner) have endorsed the scheme, but the A$4.43 offer is 25% above intrinsic value—a margin that may not justify the transaction's complexity. Here's what investors should consider:

1. The Risk of a Special Dividend:
   Domain may declare a Permitted Special Dividend (up to A$0.10 per share) before the deal closes. If paid, this would reduce the effective offer price to A$4.33 per share.

2. The Cost of Certainty:
   While CoStar's offer provides a guaranteed payout, it locks shareholders into a fixed return. If Domain's intrinsic value rises to A$4.01 (relative valuation) or higher, shareholders might regret accepting A$4.43.

3. The Downside of Waiting:
   With the Scheme Meeting scheduled for mid-August 2025, shareholders must weigh the risk of a superior offer against the certainty of A$4.43. Historically, Australian takeovers rarely see higher bids once FIRB and shareholder approvals are secured.

The Path Forward: A Call for Pragmatism

For shareholders, the decision is a classic trade-off between certainty and upside potential. CoStar's offer is fair but not exceptional. Given Domain's strong cash flow and strategic value, a higher bid could emerge—though this is unlikely given the regulatory hurdles and CoStar's exclusive access to due diligence.

Final Verdict: A Strategic Win for CoStar, a Mixed Bag for Domain Shareholders

CoStar's acquisition of Domain is a strategic masterstroke, positioning the U.S. giant to capitalize on Australia's rebounding real estate market. For Domain's shareholders, however, the A$4.43 offer is a reasonable but not extraordinary payout. With the stock currently trading at a 25% premium to intrinsic value, those seeking downside protection should support the scheme. But those with a higher risk tolerance might consider holding out for a better offer—though the odds are slim.

In the end, the real winners will be the consumers. By injecting competition into Australia's real estate market, CoStar's takeover could drive innovation and lower costs for buyers, sellers, and agents alike. For investors, the lesson is clear: Valuation gaps exist, but only the most patient and discerning can exploit them.