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Mike Goodman

November 2009

Only a pahnd, guv!

Bargain purchase of HEA lifts LSL to second in agency rankings

THE £1 deal agreed for Halifax Estate Agents by LSL Property Services brings back fond memories.

The announcement came almost 15 years to the day since the then Hambro Countrywide hit the business headlines with a similar deal for Nationwide Estate Agents.

That £1 deal added 300 offices to the Hambro Countrywide network making it the then-biggest chain with over 750 offices.

Need we add the 300 had been big loss makers under Nationwide and Harry Hill, the then managing director of Hambro Countrywide, said it was either the deal of a lifetime or the biggest Horlicks in the business, or words to that effect.

It was not quite a £1 deal as Hambro Countrywide also paid £12 million for the Nationwide surveying business.

Nationwide was paid in Hambro Countrywide shares, a wise move in retrospect, and a couple of years later Nationwide sold its stake at a handsome profit.

The rest is of course history. Hambro Countrywide flourished as the housing market staged its post-1997 recovery.

Anyone who held Hambro Countrywide shares in 1994 and held on would have realised 10 times their original investment when Countrywide finally sold out to Apollo LLP in 2007.

Actually, they made even more as Countrywide previously spun off its life assurance company as Chesnara plc.

I wonder if history will repeat itself? The LSL deal is perhaps even better, as it comes with £22 million cash to pay for restructuring and integration of the HEA business into LSL. It’s a sort of ‘dowry’.

The other plus is that HEA claims £38 million net assets while its 218 branches added to the existing LSL network brings the tally to 584.

That will mean LSL overtaking Connells to become the second largest estate agency network to Countrywide.

The HEA offices, of which 93 are franchised,will be integrated with LSL’s network once the deal is completed in January 2010 and will be rebranded as Your Move, Reeds Rains and InterCounty, depending on where they are located.

There is some branch overlap but the acquisition will take LSL into some new territory, such as Wales, Northern Ireland and the South Coast.

LSL will also benefit from the HEA asset management, lettings and conveyancing businesses. The asset management business has a three-year contract with Bank of Scotland to manage repossessed properties.

Now for the possible downside. During 2008, HEA reported a £58 million trading loss, on £34 million revenue.

In 2007, there was also a trading loss, of £25 million on £96 million revenue. From late 2007 to 2008 it cut its network by a third, hence the fall in revenue. In 2006 it also reported a trading loss, of £23 million, on £108 million revenue.

However, “asset sales” meant the pre-tax loss in 2008 was only £2 million, while HEA actually made a pre-tax profit of £33 million in 2007, but reported a pre-tax loss of £7.2 million in 2006.
This suggests a business that has been shrinking and did not share in the bumper profits earned by most of its competitors in the boom years.

Simon Embley, LSL’s chief executive, says head office and other central costs weighed heavily on HEA.

“If we can strip these out, we could cut annual costs by £50 million during two years, and if the housing market improves in the meantime, the acquisition will pay its way,” he said.

“There is not really much balance sheet risk for us with this transaction. The risk is around execution but we have the track record.”

Indeed, LSL began with a buyout of Your Move from Aviva in 2004. Under the ownership of the insurance group, it was seldom profitable, but soon turned around. A year later, LSL acquired Reeds Rains.

LSL remain cautious about the housing market. The directors believe that despite a good summer, the number of transactions will still be less than 600,000 this year, compared with only 512,000 last year.

They assume “a continuation of the current run rate of transaction levels in 2010”.

Even so, LSL chairman Roger Matthews and his colleagues believe the HEA acquisition will “have a positive cash impact” next year and be “earnings enhancing and cash flow-positive in 2011 and subsequent years”.

In other words, a little jam next year and even more after that.

City analysts evidently liked the deal as the LSL share price reached a 12-month high of 315p, valuing the group at near £300 million.

Analysts also liked remarks by Mr Matthews when he said trading since July 1 was “ahead of expectations”.

It might have escaped under the radar, but Harris Associates LLP, the US-based value investment house, sold nearly two million shares early in October, bringing its stake down to 11.2 per cent.

However, Aegon investment managers acquired 4.9 million shares representing a 4.72 per cent stake.

The deal looks good news for LSL and its shareholders. It’s not such good news for Halifax staff who run the bank counters in 121 HEA branches.

Halifax is closing them down with the possible loss of about 460 full-time jobs. But it should be good news for other HEA staff, as about 1,000 will move to LSL, including 130 mortgage consultants.

It’s not such good news for the UK taxpayer who owns 43 per cent of Lloyds Banking Group, which rescued HBOS (Halifax Bank of Scotland) in October 2008.

Analysts say the Lloyds group is selling HEA as a “tidying up operation”. Perhaps the terms might have improved if LBG had waited and taken action to curb HEA losses.

However, it’s an open question whether the UK government should own an estate agency, even if it was an indirect stake, inherited with the Halifax.

As I suggested in my November 2008 column, perhaps the business should have been re-named Brown and Darling.

The sale of HEA does nothing to raise extra capital for LBG. Perhaps LBG shareholders should have bought LSL shares last winter. They could have enjoyed a 500 per cent return, which is more than they have enjoyed with LBG despite the recent revival in the share price to near 100p.

The last word comes from Roger Matthews, LSL chairman, who said: “This is a significant opportunity for LSL to acquire a high quality branch network, an established asset management business and pipeline of sales, on favourable commercial terms at a low point in the economic cycle.”

In short, a bargain, guv.