Zoopla Property Group Plc (“ZPG”) has announced that it has conditionally agreed to acquire The Property Software Group (“PSG”), the UK’s market-leading provider of software solutions to property professionals, used in over 8,000 agency branches.

PSG was sold by the Guardian Media Group in December 2013 for £17.8million, in a management buyout backed by LDC and this sale at £75 million brings a return to LDC of over four times its investment, just 27 months later. An impressive sum for a company that was established less than 10 years ago and made underlying profits of £5.1million in the last financial year (to March 2016).

PSG software products provide daily workflow tools to over 8,000 estate and letting agencies (quoted as being around 40 per cent) across the UK through its cloud-based (Alto, Jupix) and desktop (Vebra, Core, CFP) software products and provides essential systems for the day-to-day management of inventory, marketing and communications as well as diary management, chain progression, business reporting tools and financial processes.

PSG’s newest products, MyPropertyFile and MoveIT, provide agents with digital platforms for engaging more effectively with their clients and generating additional revenue streams from a variety of property-related services.

The acquisition of PSG is, says ZPG, a core part of its continued mission to ‘be the most effective partner for UK property professionals’ and will enable the enlarged Group to offer agents the UK property industry’s first end-to-end solution including software and CRM, digital marketing and market insight tools and further revenue opportunities.

PSG has an impressive financial track record, a strong management team with deep software and property market expertise, a market-leading product proposition and significant growth opportunities both in its core software business and new products. Post completion, PSG will continue to operate as a standalone platform and brand with business as usual and the PSG team becoming an integral part of the wider Group. Mark Goddard, CEO of PSG, will become Managing Director of the Group’s Property Services division, reporting to ZPG Founder & CEO, Alex Chesterman.

Completion is conditional upon either the cancellation of PSG’s existing FCA Consumer Credit License or FCA approval of the change of control of PSG, whichever is the earlier.

Alex Chesterman (left), Founder & CEO of Zoopla Property Group Plc said, “This acquisition is a game-changer, combining ZPG’s best-in-class property marketing solutions with PSG’s best-in-class property workflow solutions, and will transform the services available for both UK agents and consumers.

“We will be able to offer UK property professionals an unrivalled proposition supporting them with their software and CRM solutions, digital marketing requirements, data and market insight tools along with providing them a range of new revenue opportunities through PSG’s MoveIT platform.

“Our ambition has always been to be the most effective partner to the UK property industry and this deal will allow us to work more closely with our agent partners and offer them an even more compelling service. I look forward to welcoming Mark and his team to the ZPG family.”

Mark Goddard (right), CEO of The Property Software Group added, “I am very proud of what we have achieved over the last 9 years but it is just the start. We’ve had a long-standing relationship with the team at ZPG and are incredibly excited to continue our journey as part of their growth and innovation story. We are very much looking forward to continuing to develop unmatched software tools and innovative products and to delivering even better value to our clients.”

Jeffries, the investment banking firm, reacted to the news with a ‘BUY’ rating.
“Rating BUY; Price Target 415.00p (from 400.00p); Price 277.30p, saying: “Cutting out the middle man. In essence today’s acquisition will ultimately lead to less complexity and more services for Zoopla and PSG’s customers. For instance in all but the smallest UK businesses, agents upload property details to their back office systems before uploading again to the property portals. Today’s acquisition will allow Zoopla to provide a one stop shop for day to day inventory and CRM management all the way through to digital marketing.

Market leader. PSG provides software to around 8,000 branches (a c.40% market share) and we understand that the next largest player Reapit has around a 15% market share.

Sticky customers. Customer churn is much lower for PSG than it has been in Zoopla’s recent past, in the year to 31 March 2016 customer retention was more than 97%

Cross selling opportunities. We understand that only around 3,000 of PSG’s customers currently use the Zoopla platform, by providing an end to end solution we expect many the PSG only customers to join the Zoopla platform over the medium, although do not factor such cross-selling into our estimates.

Financial highlights. Acquisition consideration £75m (implied 14.7x EBITDA – year to 31 March 16). We have penciled in c.20% EBITDA growth for FY17 and FY18, with 4 months contribution for Zoopla’s FY16

Estimate changes. Our initial take is that consensus EPS will increase by c.3% for FY16 and c.5% in FY17.

Valuation/Risks
Valuation: At 277p Zoopla trades on a CY2016E PER of 22.9x and EV/EBITDA of 18.0x. Our PT of 415p is based on DCF valuation weighted 50% to our Neutral Case, 40% to our Bull Case and 10% to our Downside Case.
Risks: The key risks to our estimates are the threat of challenger portal OTM, integration risks relating to acquisitions (U-Switch and PSG) and a downturn in the UK housing market leading to a material reduction in the number of estate agency branches and new build developments.