Is Connells calling the bottom of the UK housing market?
Connell's indicative approach to takeover Countrywide, which coincided with great vaccine news from Pfizer, may well have been timed to perfection. Whilst the vaccine still has many hurdles to clear so does Connell's approach to Countrywide, but we may find, with hindsight, that the 9th November turns out to mark the trough of the UK housing market downturn.
Connells is a very successful and well-managed estate agency business. It has a clear focus and a consistent strategy that is working and working well, in my view.
Countrywide has some great assets but has been wrong-footed by the ghosts of strategies past. With hindsight, the strategy was focused on the wrong things at the wrong time. As the UK housing market started to soften in the run-up to the UK’s EU Referendum, operational gearing started to work against the Group and a growing level of debt hampered its ability to get back on track.
The alchemists Private Equity believes that it can once again turn Countrywide into gold, that it can invest today and make money tomorrow. In a sense, they have got this party started, but it will be fascinating to see how the party lasts and who is dancing with Countrywide when the music stops.
Operational vs Financial turnaround
In my view, if Connell's bid were successful, it would focus solely on an operational turnaround. It understands the moving parts of the UK housing market and as a private company can focus on business without being blinded by the glare of the stock market’s spotlight, a spotlight which is often more focused on short term share price performance than longer-term sustainability.
Connells is an estate agency business and makes its money out of estate agency and estate agency is a people business.
If Countrywide’s future were placed into the hands of Private Equity the story may have a different ending. Private equity seeks to make money out of investments rather than estate agency. In this case, the two are of course linked, but Private Equity’s business model is “invest – grow – exit”. Private equity will seek to maximise its financial returns at the point of exit rather than the company’s longer-term returns. The two may well be linked, but often are not. Private equity is first and foremost a financial business.
Countrywide and Connells are two of the largest estate agency groups in the UK, there could well be competition considerations in terms of the local market share of estate agency branches. The competition authorities will also probably want to consider the market share of the combined financial services, surveying and conveyancing operations.
Private Equity will probably want to shake-up the management team, but one thing we have learnt from recent history is that it is difficult for those from outside of the industry to prosper. The housing market operates very differently from other sectors and a playbook from outside of the UK housing sector has yet to play out well within the UK housing sector. The number of large estate agency group’s is small and so, in my view, is the list of those management teams willing, able and qualified to take on the task to rebuild Countrywide.
Whose choice is it anyway?
Although listed on the London Stock market, the four largest shareholders in Countrywide control just over 50% of the shares, the top ten just over 77% these are the shareholder who will drive the decision making. Connells has made an indicative offer of 250p per share in an all-cash deal. This means that if shareholders accept the offer indicative offer they would take the cash and walk away and have no further involvement.