Global credit monitoring agency Fitch Ratings has endorsed Connells’ attempted purchase of rival Countrywide in its latest rating of Skipton Building Society (SBS), Connell’s parent company.
SBS is the UK’s fourth largest building society and is described by Fitch as a low-risk and stable business focussing on UK residential mortgages.
It has owned Connells since 2010, but Fitch has given SBS an A minus negative outlook because it says Connells was “affected by the first lockdown measures introduced by the UK government in March 2020, which caused the estate agent to temporarily close its entire network of almost 600 branches and furlough a number of its staff”.
But it’s Fitch’s comments about Connells attempted purchase of Countrywide which are more interesting.
“We believe that Countrywide’s franchise is complementary to that of Connells and we estimate that post-acquisition, if completed, the latter’s share of UK property transactions (currently around 5%) would approximately double and could, overtime, support a stronger company profile on additional diversification.
“A combined entity would help further broaden SBS’s revenue streams and if, executed successfully, improve the society’s structural profitability, supported by cost synergies and the fee-generative and capital-light nature of these businesses,” it says.
But the endorsement comes with a warning. Fitch says it has been told by Connells that Countrywide needs substantial investments in technology, branches and staff to turn the ship around.
“The risks Connells and SBS face include the ability to integrate Countrywide and resolve some of the structural factors that are constraining its earnings,” says Fitch.
“The business also remains highly sensitive to the outlook for the UK housing market, which remains uncertain. We consider these risks to be more medium-term in nature, with immediate risks to the society’s financial profile likely to be limited.”