We believe that many of the solutions CoStar Group so successfully offers today, which are only delivered to commercial real estate, can be extended into residential real estate. Marketplaces like Apartments.com and LoopNet are just two examples of these opportunities. Conversely, many of the products CoreLogic only offers to residential audiences today could also be offered to commercial real estate audiences. Property Tax Solutions, Appraisal Management, Symbility, Flood Data Solutions, and Building Cost Data are just a few examples of these opportunities. We believe that by leveraging existing technology assets into new segments of real estate the combined company can create additional significant new cross-selling and revenue synergies.
Further, we believe that we can achieve all of these synergies while significantly reducing the volatility of CoreLogic’s revenue, which have historically experienced exposure to market cycles. Much of CoreLogic’s revenues are reoccurring, but that is very different from subscription revenue. Reoccurring revenue is volatile, while subscription is much less so and has greater visibility. CoStar has a track record of acquiring businesses with seasonal or cyclical revenue variances associated with reoccurring revenue and converting those businesses to predictable and stable subscription revenue. Eighty percent of CoStar’s revenue is subscription-based, up from 67% five years ago. LoopNet, Apartments.com, ForRent.com, and Apartment Finder were all businesses with only reoccurring revenue. In the aggregate, we have now converted the vast majority of revenue in those products to predictable subscription revenue. We sell our information services to banks for commercial loans on a stable subscription basis, while CoreLogic sells it on a variable on-demand basis. We believe that there is a clear opportunity to convert that revenue and other CoreLogic revenue into more predicable subscription revenue.
Since CoStar Group and CoreLogic serve very different industry segments with cycles that are generally not correlated, combining the companies will further diversify the revenue sources and create a more stable combined entity.
Addressing Rumored CoreLogic Board Concerns
Since October 2020, we have made multiple acquisition proposals to CoreLogic. We were surprised to see your announcement of the Pending Transaction when we believed that our last conversation with your advisors had addressed all of your remaining concerns. The media has speculated about the reasons the CoreLogic Board may have chosen to accept an inferior offer and while none were identified in our negotiations as conditions to acceptance of our offer, we have attempted to address them in our Proposal, including: time to close, antitrust and interim business operations.
This deal has a very high certainty of closing in a rapid time frame. We expect that the transaction should close within 6 months, barring any material unforeseen issues. As detailed below, we have provided a customary 12-month termination date to allow appropriate certainty of closing, with any further extension requiring CoreLogic’s consent.
Throughout this process your advisors, our advisors, analyst reports, and major shareholders have agreed that there is no antitrust risk in this combination. CoStar Group provides commercial property listings and analytics to commercial real estate brokers and owners and internet marketplaces for lead generation for commercial properties for lease and sale. CoreLogic, on the other hand, aggregates publicly available property tax assessment data, publicly recorded sales and mortgage transactions to provide various solutions needed in residential real estate. In addition, CoreLogic provides multiple listing services the software and hosting services they need to manage residential listings. Our respective companies are in completely different markets. CoStar and CoreLogic do not compete with one another in any way. No client or prospect ever chooses between buying a CoreLogic solution versus buying a CoStar Group solution. They cannot because our products are completely different. Given the presence of multiple providers of the publicly available data CoreLogic resells, there are simply no meaningful antitrust concerns.
We had already agreed to accept an efforts covenant that addressed all of the remote antitrust risks identified by both of our respective counsel. Beyond that and to match the Pending Transaction, we agree that if the transaction does not close due to a failure to obtain antitrust approvals, CoStar will pay a reverse termination fee in the amount of $330 million. That will give the CoreLogic Board certainty of close. And while there may have been legitimate antitrust risks when a Black Knight affiliate was attempting a hostile takeover of CoreLogic, there are no such risks here. CoreLogic stockholders will demand a more credible explanation than antitrust concerns before voting to accept the Pending Transaction over our Proposal and losing a billion dollars of value.
We are committed to allowing CoreLogic to continue to operate its business in the ordinary course subject to limited and customary CoStar approval rights – with such approval not to be unreasonably withheld – over activities that could impact the cost of the transaction or the value of CoreLogic’s business. It is as important to CoStar as it is CoreLogic stakeholders that your company remains healthy and stable. We reiterate our prior commitment to working together and responding promptly to any requests that you have in order to operate your business in the interim period, and have now included that if we do not respond within two business days of any requested consent, CoreLogic will be free to proceed with such requested action. We believe the CoreLogic stockholders would appreciate the fact that CoStar has a thirty-plus year history of working seamlessly with acquired companies to arrive at a successful closing. Core to that success is CoStar’s track record of allowing such companies the freedom to continue running their businesses in any relevant interim period. Our Proposal would allow CoreLogic management to have as much, and in some instances more, operational flexibility as compared to the terms of your Pending Transaction.
CoreLogic’s talented management team and staff is a critical part of the proposed combination. We absolutely want to retain that talent and see them grow in the new combined company. Our Proposal also allows for various personnel compensation-related matters that your management team last presented to us as important, including adequate pre-closing flexibility, while balancing against the need to preserve incentives for post-closing retention of CoreLogic personnel. Further, we believe that our Proposal is superior to the terms of the Pending Transaction with respect to both (i) preserving your flexibility between signing and closing as to employment and compensation matters and (ii) the potential purchaser’s obligations with respect to your continuing employees during the 12 months following the closing.
In addition, we assume that media speculation around the CoreLogic Board demanding an equity collar on our prior proposed exchange ratio was erroneous because that was never communicated to us. In fact, both of our financial advisors agreed that an equity collar would present an inconsistent message to stockholders, given the merits and strong rationale for the combination. We instead focused on offering CoreLogic stockholders the highest value possible, rather than a lower value with a collar.
It has been reported that Stone Point has secured $5.5 billion of debt to finance its acquisition of CoreLogic. If true, that implies leverage of over ten times, based on historical EBITDA – a crushing debt load, with potentially devastating consequences for CoreLogic, its employees, and clients. For a business that could otherwise invest in its technology and product offerings, will there be any room for those investments in the future? For a business that has historically cycled with the economy will the business be strong enough to survive an economic downturn? The extreme level of debt could have a very negative impact on the ten thousand employees and contractors who depend on CoreLogic for their paychecks. CoreLogic’s solutions are valued by banks, real estate agents, government agencies, and many others. If CoreLogic is loaded with massive debt, will it put those clients’ operations at risk? Will Stone Point be under pressure to hastily break CoreLogic into many pieces and sell them off? We believe that these are some of the important considerations for Board deliberations beyond deal economics.
In CoStar Group’s proposed acquisition of CoreLogic the result would be a company with a rock solid balance sheet with strong cash flow for investment, innovation, competition, and growth. CoreLogic’s employees, clients, communities, and our combined shareholders would benefit from a strong future for the combined company.
As you are aware, our financial advisor is Goldman Sachs, our legal advisor is Latham & Watkins LLP, and we and they are available to discuss any aspect of the Proposal. We and our advisors have reviewed the merger agreement regarding the Pending Transaction. On that basis, we are separately sending to you and your legal advisors drafts of the merger agreement and disclosure schedules which we would be prepared to enter into in all material respects.
We continue to review all potential possibilities for the benefit of our stockholders and the future of the CoStar business.
