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We take a look at why the proposals were made, rejected and whether a higher price will be offered
Thursday 23 Nov 2017 Author: Tom Sieber

Price comparison site GoCompare (GOCO) has rejected two takeover proposals from Zoopla-owner ZPG (ZPG). The suitor is now said to be considering its options ahead of a 12 December ‘put up or shut up’ deadline.

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Both proposals (one in May and another in November) valued the business at £460m or 110p per share; the first was structured as an all-share deal and the second was a mixture of cash and shares. GoCompare says 110p per share undervalues its business.

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1. Who are the two parties involved?

Daily Mail & General Trust (DMGT) floated online property site Zoopla in June 2014. The founder and current CEO of the group, Alex Chesterman has since pursued an ambitious plan to create a one-stop-shop for consumers to ‘research, find and manage their homes’ at the front end and offer an ‘end-to-end solution for property professionals’ at the back end.

This has largely been achieved by the acquisition of comparison sites such as uSwitch and Money.co.uk, as well as several other ancillary businesses. The transformation was marked by a change of group name to ZPG in February 2017.

Like ZPG, GoCompare started life as a spin-off from another company. It was siphoned off from insurer Esure (ESUR) in 2016.

GoCompare’s brand is probably best known for the irritating but enduring adverts featuring fictional opera singer Gio Compario. Since being listed as a standalone business at 76p per share, GoCompare’s shares initially went through a rocky patch before racing ahead thanks to solid financial results.

Comparison sites tend to operate across several ‘verticals’ like insurance, utilities and financial products and GoCompare derives 92% of its revenue from a competitive insurance market.

2. Why is ZPG interested in GoCompare?

ZPG has not gone on the record to explain its rationale for the deal but presumably Chesterman sees it as a means of rounding out its price comparison offering.

Investec analyst Steve Liechti reckons the deal has merit. ‘GoCompare makes sense for ZPG, in our view, for its £143m of insurance switching sales (no.2 player) – a competitive and well penetrated but growing market.

‘ZPG already owns uSwitch and Money.co.uk with strength in utilities/financial services switching, but insurance capability is sub-scale.’

3. What are the risks for ZPG?

ZPG’s previous acquisitions had a closer fit to its property market focus. Although GoCompare does not strip out different types of insurance in terms of their revenue contribution, motor insurance is believed to account for the majority.

Shore Capital analyst Roddy Davidson has concerns about a tie-up. ‘We are uneasy that ZPG’s strategy in the price comparison space appears to have moved on rapidly from building on the strength of uSwitch’s position in the home services space, developing complementary financial services switching revenues (following the recent acquisition of Money.co.uk), and cross selling with its digital property brands (an approach that we believe offers potentially significant incremental revenue potential), to adopting a less focused and more generic model,’ he says.

Davidson adds that recent M&A has already made the business more complex and the process of integrating GoCompare has material execution risks and could strain the resources of management.

He also comments that GoCompare is ‘behind the curve in terms of its software and technology infrastructure, and the depth of its offering to consumers when compared to other comparison players’.

4. Why was the proposal turned down and does it undervalue GoCompare?

According to GoCompare chairman Peter Wood the takeover proposal ‘is highly opportunistic and fundamentally undervalues the company and its prospects’.

While the deal represented a relatively modest premium of 16% to the 95p closing price on the day prior to the receipt of the latest proposal, it was priced at a discount to a close of 110.5p less than a month earlier on 11 October.

Investec’s Liechti, perhaps unsurprisingly given he has a ‘sell’ recommendation and 99p price target on GoCompare, says the price is ‘not generous, but arguably realistic given our fundamental view’.

It is difficult to see shareholders warming to ZPG’s interest unless there is more money on the table. Investment bank Berenberg, which is more positive on GoCompare, thinks a bid of at least 130p would be required.

5. Could the deal be revived?

It seems odd that ZPG didn’t raise its proposed price second time around for GoCompare given that its first proposal was turned down.

Liechti believes the suitor ‘does not wish to pay up’, so one could assume the ground is being prepared for another approach and an attempt is being made to flush out shareholders who would be amenable to an improved offer.

Reuters reports that an unnamed major shareholder at GoCompare believes the firm should ‘react positively’ to a bid in the region of 125p.

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