NEW YORK (TheStreet) -- Zillow (Z) announced it is buying Trulia (TRLA) in a $3.5 billion in a stock-for-stock transaction that will allow Zillow to continue increasing its brand of online real estate assets, as both companies come from a "mutual position of strength," according to Zillow CEO Spencer Rascoff.

The Boards of Directors of both companies have approved the transaction, which is expected to close in 2015, with Trulia CEO Pete Flint remaining as Trulia CEO, and reporting to Rascoff, as well as joining the board of the combined company. The combined company, which does not have a name yet, will maintain both the Zillow and Trulia consumer brands.

Rascoff, who said he first approached Trulia about 6 weeks ago, said the deal was done now, as both companies are in a position of strength.

"Both companies are doing really well in terms of revenue and traffic," Rascoff said in an interview with TheStreet. "The Trulia board felt it was a very attractive deal for shareholders. We're both media brands, and [the deal] increases audience and reach. In terms of timing, the stars aligned."

The online real estate market is still an incredibly fragmented market, with an estimated $12 billion spent annually by real estate professionals marketing their services.

Rascoff noted the combined company would only have around 4% of total real estate professional advertising spending, so he did not expect there to be regulatory concerns about the deal, which is expected to close sometime in 2015.

"Trulia and Zillow have a shared mission and vision of empowering consumers while helping real estate agents, brokerages and franchisors benefit from technological innovation," Flint said in the press release. "By working together, we will be able to create even more value for home buyers, sellers, and renters, as well as create a robust marketing platform that will help our industry partners connect with potential clients and grow their businesses even more efficiently. Our two companies share complementary employee cultures with innovative, consumer-first philosophies and a deep commitment to create the best products and services for our industry partners."

Shares of Trulia were soaring on the back of the announcement, gaining 12.9% to $63.80, while Zillow shares were off 3.1% to $154.00 in premarket trading.

In a research note, Oppenheimer analyst Jason Helfstein said the fair value for the combined company would be approximately $150 a share, but that could be conservative. "By 2020, we see the combined company with ~70% of online real estate lead generation, reaching 60% EBITDA margins," Helfstein wrote in a note.

As part of the deal, Trulia shareholders will receive 0.444% shares of Zillow, and Trulia shareholders will own 33% of the company, with Zillow shareholders owning the rest.  Zillow co-founders Rich Barton and Lloyd Frink, who control a majority of the shareholder voting power of Zillow, have agreed to vote in favor of the transaction. Rascoff said that Barton "was in the heat of negotiations for the last six weeks on this."

Zillow, which has not yet reported second-quarter results, has continued to experience tremendous growth, reporting 83 million unique users across mobile devices and the web, while Trulia reported 54 million unique users for June. Though there is limited consumer overlap between the two companies, the transaction will have corporate cost savings, with $100 million in annualized expenses saved by 2016, according to management.

"It's very early days in this category," Rascoff said, when asked why investors would benefit from the deal. "It's a fragmented and immature category, and we have a long and exciting road ahead of us."

--Written by Chris Ciaccia in New York

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TheStreet Ratings team rates ZILLOW INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate ZILLOW INC (Z) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and feeble growth in the company's earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Z's very impressive revenue growth greatly exceeded the industry average of 11.5%. Since the same quarter one year prior, revenues leaped by 70.0%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Z has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 8.42, which clearly demonstrates the ability to cover short-term cash needs.
  • The gross profit margin for ZILLOW INC is currently very high, coming in at 92.64%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -9.44% is in-line with the industry average.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Internet Software & Services industry. The net income has significantly decreased by 67.0% when compared to the same quarter one year ago, falling from -$3.75 million to -$6.26 million.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Internet Software & Services industry and the overall market, ZILLOW INC's return on equity significantly trails that of both the industry average and the S&P 500.

TheStreet Ratings team rates TRULIA INC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:

"We rate TRULIA INC (TRLA) a SELL. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income and feeble growth in its earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Internet Software & Services industry. The net income has significantly decreased by 664.4% when compared to the same quarter one year ago, falling from -$1.98 million to -$15.15 million.
  • TRULIA INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past year. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, TRULIA INC reported poor results of -$0.50 versus -$0.12 in the prior year. This year, the market expects an improvement in earnings (-$0.36 versus -$0.50).
  • TRLA's debt-to-equity ratio of 0.61 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 6.96 is very high and demonstrates very strong liquidity.
  • Compared to other companies in the Internet Software & Services industry and the overall market, TRULIA INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • The gross profit margin for TRULIA INC is currently very high, coming in at 92.95%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -27.80% is in-line with the industry average.

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