Is Tosca’s bid to take over easyProperty a gamble too far? And what does it mean for the shareholders of eProp Services and the members of the Guild and Fine & Country?
On 10 Dec 2015 easyProperty reported that it had secured £25m of funding in a funding round led by Toscafund an investment which valued easyProperty at more than £100m.
On 1 June 2019, Tosca launched a bid to take over eProp (the parent company of easyProperty) offering less than £18m for the whole group, which is more than 5x less than the valuation they were happy with in 2015. Is that good news they are buying it on the cheap or bad news that the value has fallen my more than 80% in less than three and a half years?
Rubbing salt into the wounds
To make matters worse, if Tosca’s bid is successful it would not only own easyProperty (at a very much reduced valuation) but also the Guild of Property Professionals and Fine & Country as well, so the family silver is being thrown in to for good measure too.
This raises another interesting issue. The Guild of Property Professionals and Fine & country are two of the UK’s standard bearers for independent high street estate agents. How will their members feel if their standard bearers become owned by a company that appears single minded in its desire to invest in passive intermediaries, to invest away from the high street rather than into it? I am sure that I won’t be alone in suggesting that at first glance it is not entirely clear how this story will end well.
It is difficult to see how a passive offering can co-exist with a full service one. No doubt under pressure from investors, the previous management at Countrywide tried it and demonstrated the difficulties in operating competing offerings. Fortunately, in my view, Countrywide correctly chose to back the high street rather than reinvent itself as Countrywide-lite.
I appreciate that one cannot look at Countrywide as a picture of full health and I am not blind to the current challenges faced by Countrywide, but at the final analysis they did choose to keep their feet on the high street rather than their head in the cloud.
If Tosca now believes in the high street and has taken its head out of the cloud and put its feet on the high street, why is it not seeking to support Countrywide, LSL or Foxtons rather than investing ever more into the passive intermediary space? Tosca recently increased its investment in Purplebricks to over 5% and also backs HouseSimple.
So what has gone wrong?
House prices and housing transactions have not fallen as much as the implied valuation of easyProperty in the intervening three and a half years. The addressable market is still about 1 million housing transactions a year.
Could it simply be that the best thing since sliced bread has become stale? Maybe as some have suggested for several years the passive intermediary model just doesn’t work.
Passive Intermediaries for the few not the many
To be clear, I believe that passive intermediaries such as easyProperty have their place, but they are for the few not the many. I have been consistent in my view that the passive intermediary model is suitable only for the ‘for sale by owner’ market. Those who believe that portals rather than agents sell homes and those who are happy to take on the logistical, emotional and administrative burdens of selling their home (whilst typically buying another one at the same time) themselves. The majority of people do not want to sell their home unaided and that is why around 90% of homeowners continue to choose to use a traditional estate agent.
A good local agent will add value to the homeowner in many ways, including but not limited to:
- Fully understanding the current detail of very local market conditions
- Professionally market their home
- Finding, qualifying and scoring the suitability of applicants (agents see the applicant regularly and get feedback from them from their whole house buying journey. When selling a home yourself you get to see an applicant at just one point in this journey, you therefore do not see the complete picture)
- Professionally conducting viewings (never conduct you own viewings, it puts buyers on edge, which makes them uncomfortable and the feeling of discomfort is not conducive to making an attractive offer)
- Negotiating the best price (agents negotiate prices every day, I negotiate house prices so infrequently it would be very surprising if I was any good at it)
- Helping to steer you through the legal implications of home buying and selling
- Sharing the burden and help manage the highly stressful and emotional process of managing chains
What is easyWay forward?
Local local local
It appears to me that top down agency very rarely works. Under Michael Bruce Purplebricks had a very top down strategy and after several profit warnings he was asked to leave. At the other end of the scale when the previous management team of Countrywide tried to control things from the top it didn’t go well and they are now pursuing a back to basics strategy. Compare that to the LSLi division of LSL where individual firms such as Thomas Morris are given autonomy to plan at a local level and manage at a local level and their creaking trophy cabinet speaks volumes about the effectiveness of the local model.
Simple Simple Simple
Do one thing, do it well and keep doing it. Rightmove does one thing very well: UK property search and it is currently valued at more than £5bn and turns £75 of every £100 agents spend with it into pure profit. ZPG is engaged in several things: property search, software, price comparison services and data analytics – it was sold last year for £2.2bn, less than half of Rightmove’s value today.
How should Guild and Fine & Country members view the proposed deal?
I believe that the Guild and Fine & Country are champions of independent high street agents, they seek to provide the tools, the service and the support to agents up and down the country (and increasingly overseas) to help them profitably grow their businesses and sustain those profits. I have seen first-hand the dedication and passion that the team has for independent high street agents.
With hindsight the easyProperty strategy hasn’t worked, but as with Countrywide they should not be criticised for trying a passive intermediary strategy, however, if mistakes have been made, lessons need to be learned from them.
If I were one of the 600 shareholders in eProp Services plc I would want to:
- Understand what the strategy is going forward and the relative importance of easyProperty, the Guild and Fine & Country in the future of the Group.
- Understand how the value ascribed to easyProperty has fallen so far in such a small amount of time
- Ask if less than £18m the correct price for easyProperty and the family silver of the Guild and Fine & Country?
- Ask why if Tosca is so supportive of passive intermediaries why doesn’t it just buy easyProperty? Surely better to sell easyProperty and invest the cash purely into the tools, the services and the support that help high street agents than to invest in a business that has so far consumed cash rather than generated it.
Can an investor be divided against itself?
Tosca has investments in Purplebricks, HouseSimple and easyProperty. If it still firmly believes that passive intermediaries will move the market away from the high street then perhaps it should exit the high street itself rather than uncomfortably having one foot on the high street and one foot in the cloud. Perhaps rather than trying to combine the cloud and the high street it should keep its head in the cloud and seek to merge Purplebricks, HouseSimple and easyProperty. This would certainly help control the passive intermediaries high marketing spend.
Tosca’s recent increased investment in Purplebricks suggest it still has its head in the clouds rather than its feet on the high street (after all if one believes in the high street rather than the cloud then one could argue that Countrywide’s shares are valued significantly below those of Purplebricks).
I began this post by asking if this potential deal is a gamble too far? My concern is that it might be a gamble too far for both Tosca and the shareholders of eProp.
Keep it simple, keep it local, keep it focused. Unfortunately it appears to me that the proposal as reported in the press is none of these. I would urge all eProp shareholders to carefully read the details of the proposal before deciding whether to vote for it or against it.