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…