Third Point, DE Shaw obtain agreements with CoStar. How they can build value

Business: CoStar Group is a provider of online real estate marketplaces, information and analytics in the property markets. It manages its business in two segments: North America, which includes the United States and Canada, and International, which primarily includes Europe, Asia-Pacific and Latin America. Its major brands include CoStar, a global provider of commercial real estate data, analytics and news; LoopNet, a commercial real estate marketplace; Apartments.com, a platform for apartment rentals; and Homes.com, a residential real estate marketplace.

Stock Market Value: $32.64B ($77.39 per share)

D.E. Shaw Ownership: n/a

Third Point Ownership: 2.04%

Average Cost: n/a

Activist Commentary: D.E. Shaw is a large multi-strategy fund that is not historically known for activism. The firm is not an activist investor. Rather, it uses activism as an opportunistic tool in situations where the firm deems it useful. D.E. Shaw seeks out solid businesses in good industries and if it identifies underperformance that is within management’s control, it will take an active role. It places a premium on private, constructive engagement with management and as a result often comes to an agreement with the company before its position is even public.

Third Point is a multi-strategy hedge fund founded by Dan Loeb, that will selectively take activist positions. Loeb is one of the true pioneers in the field of shareholder activism and one of a handful of activists who shaped what has become modern-day shareholder activism. He invented the poison pen letter in a time when it was often necessary. As times have changed, he has transitioned from the poison pen to the power of the argument. Third Point has amicably gotten board representation at companies like Baxter and Disney, but it also will not hesitate to launch a proxy fight if it is being ignored.

On April 6, CoStar Group entered into support agreements with D.E. Shaw and Third Point in connection with a board refreshment and corporate governance enhancements. This includes the addition of Christine McCarthy, John Berisford and Rachel Glaser as directors to the board; the retirement of Michael Klein, Christopher Nassetta and Laura Kaplan from the board. It also includes the appointment of Louise Sams as independent board chair and the creation of a capital allocation committee. D.E. Shaw and Third Point agreed to abide by certain customary standstill and voting provisions.

CoStar Group is a provider of online real estate marketplaces, information, and analytics in the property markets. It manages major brands including CoStar Suite, LoopNet, Apartments.com and Homes.com. Approximately 95% of the company’s revenue is derived from the core business, which largely consists of CoStar Suite and Apartments.com, which benefit from high barriers to entry, strong pricing power, proprietary data and subscription-based business models that drive recurrent revenue and highly predictable free cash flow. Because of these dynamics, this business has historically traded at a premium to its information services peers but is now trading in line with them.

This regression in the company’s valuation largely stems from CoStar’s aggressive investment in its residential marketplace business, Homes.com, which it acquired in May 2021. Unlike its core CoStar Suite and Apartment.com businesses, Homes.com lacks clear competitive advantages and faces intense competition from well-established peers like Zillow. Nevertheless, the company is diverting approximately 75% of its $1.3 billion of earnings before interest, taxes, depreciation, and amortization from its core business to fund the $900 million of losses from Homes.com. As a result, capital expenditures are up 878% from 2021 to 2024, marked by 347% increase in 2024 alone.

Enter D.E. Shaw and Third Point who have separately entered into support agreements with CoStar in connection with a board refreshment and corporate governance enhancements. This includes the following: (i) the addition of Christine McCarthy (former CFO of Disney), John Berisford (former president of S&P Global) and Rachel Glaser (former CFO of Etsy) as directors; (ii) the retirement of Chairman Michael Klein, Christopher Nassetta and Laura Kaplan from the board; (iii) the appointment of Louise Sams as independent chairman; and (iv) the creation of a capital allocation committee, which Berisford and McCarthy will join. In activism, there are settlements that are meant to appease an activist investor to keep them quiet, and there are genuine settlements that signify real agreement with the activist on how to proceed. This one is the latter. First, the obvious indication is that three directors were replaced on an eight-person board, which is a large refreshment (approximately 40% of the board). But less obvious and more telling is the structure of the settlement and who was replaced. First, the deal was structured as a replacement of directors, not an addition of three directors, which is more common in settlements, particularly ones with relatively smaller boards (i.e., eight directors for a $30 billion company). Second, the three directors who were replaced were three of the four longest-tenured directors, excluding the CEO, and one of them was the chairman of the company since 1987. Moreover, the new chair of the board is the second newest director prior to the settlement. This is not only a board refreshment in name, but in substance as well.  

There is also a more subtle provision of the settlement that we think offers the most insight into what levers for value creation may follow – the formation of a capital allocation committee, which will consist of four directors, two of whom will be the new D.E. Shaw/Third Point directors. This is a clear situation of something that is often seen in activist campaigns – a core business that is hugely profitable but whose profits are being used to fund an unprofitable non-core business. But the plan here is not likely to completely divest the Homes.com business, or else we would have seen a strategic transactions committee. This capital allocation committee will more likely be tasked with finding ways to fund the Homes.com business without using the cash flow from the core business. This could include a spinoff of the business with CoStar retaining some ownership, a sale of a part of the business to a strategic investor or taking in some third-party capital. The capital allocation committee is also tasked with assessing international expansion. CoStar has already made moves to expand internationally, including the acquisition of OnTheMarket.com in late 2023, one of the UK’s three most visited residential property portals. The company also recently offered to acquire Australian real estate classifieds firm Domain Holdings. The capital allocation committee will certainly evaluate this potential transaction as well as others and make recommendations to the newly reconstituted board. Ultimately, the goal here is to emerge with the core CoStar business with international growth prospects being valued on a multiple of its $1.3 billion consistent to the 30+ EBITDA multiple it historically received. This would result in an approximate $45 billion enterprise value versus around $30 billion today.

Both Third Point and D.E. Shaw are not purely activists, but multi-strategy firms that often use activism as an opportunistic tool. Third Point, founded by Dan Loeb, is a true pioneer in shareholder activism, but has used it more sparingly in recent years as dictated by the market environment and available opportunities. D.E. Shaw is relatively new to activism, but the firm has shown over the last several years that it is as proficient at activism as it is at the other strategies it has been so successful with at its multi-strategy fund. While they both settled with the company in their own agreements, the two are certainly like-minded, but not acting as a group. This is an encouraging development, and it’s something we often see today but would rarely see 15 years ago: It puts stockholder value above ego. Third Point disclosed that it has a 2.04% position in CoStar. D.E. Shaw did not disclose its position, but as a $70 billion hedge fund, it does not take small activist positions: We would expect it to be at least the size of Third Point’s.  

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.