Countrywide faces multiple risks if it doesn’t sell to Connells - claim

Connells has increased the temperature in its bid for Countrywide with a surprise statement this morning outlining risks run by Countrywide if it stays a standalone company.

In particular, Connells pours cold water on an earlier and rival investment proposal by Alchemy, a private equity firm, which it dismisses as an "expensive corporate initiative."

Alchemy is offering a £90m investment in Countrywide in return for a streamlined board including the removal of chairman Peter Long, and a new chief executive officer instead of Paul Creffield.

Alchemy says the investment would be used to pay off some of its existing debts, currently £91.9m.

But Connells - which has reiterated its offer of 250p cash per share - says this morning: "The Connells Board believes that the Alchemy Proposal was just the latest in a series of expensive corporate initiatives of Countrywide over many years, all of which have promised future upside that has never been delivered.  The enormous scale of the challenge facing Countrywide can be seen by the fact that it needs to reverse the performance of a business that has lost over £500 million pre-tax over the last three calendar years.

"The Connells Board believes that a substantial cash premium today is far more attractive to Countrywide shareholders than the theoretical prospect of distant potential future upside under an as yet unknown standalone strategy to be implemented by an unknown management team, with all the attendant downside risk."

Connells says it’s conducted its due diligence on its proposed purchase of Countrywide and outlines the risks as:

Risk 1: Potential to enter administration without a significant capital injection: "The Countrywide Board has indicated that Countrywide is in urgent need of recapitalisation to reduce its net debt and lessen its exposure to its lenders.  The Countrywide Board has stated its belief that, in the absence of a recapitalisation, Countrywide is unlikely to be able to execute its business strategy over the short and medium term and comply with its current financial covenants, with the risk that it could end up in administration, leaving Countrywide shareholders exposed to losing all or a substantial portion of their investment."

Risk 2: Requirement for substantial and sustained investment over the long term: "The Connells Board believes that, over recent years, Countrywide has under-invested in its technology, branch network and people, and this, coupled with aggressive cost cutting, has contributed to its decreased market share.  The Connells Board believes that the investment needed to put the business back on a solid footing is likely to be far larger than the levels referred to in the Alchemy Proposal.  Set in the context of a challenging market, this investment will reduce Countrywide's standalone profitability and cash flow for at least the next few years."

Risk 3: Unknown management team to lead a major turnaround: "There is no clarity over who would lead Countrywide as a standalone business.  The current Countrywide management team have mostly indicated that they would step down under the Alchemy Proposal, but a new CEO has not been identified.  The Connells Board believes that turning around Countrywide requires a strong management team with deep experience in the estate agency sector.  It needs leadership with a track record in running large businesses in the sector, who can bring real market expertise and insight, not individuals from outside the industry.  Countrywide has tried bringing in an outsider before with results that Countrywide shareholders will be familiar with." 

Risk 4: Ongoing financing risks and costs even after a recapitalisation: "Even with a £90 million equity injection as contemplated by the Alchemy Proposal, Countrywide would remain exposed to material financing costs and risks.  The interest rate on the Company's new loan facility under the Alchemy Proposal would still cost up to as much as LIBOR plus 9.50%.The Alchemy Proposal would have been Countrywide's third capital raise in a little over three years.  Even before the Alchemy Proposal, Countrywide had raised nearly £180 million in new equity since March 2017 but, immediately prior to our Possible Cash Offer, it had a market capitalisation of only £47.6 million, only about a quarter of the amount raised.  Investors in the previous two capital raises have suffered material losses."

Risk 5: Highly competitive environment, with ongoing structural shift to online and hybrid estate agents: "The UK real estate services market is highly competitive with strong online and hybrid estate agents, as well as an array of strong local independent estate agents.  This structural shift has reduced margins across the sector, especially at full-service high street estate agents.Over recent years, Countrywide has struggled to compete effectively in this environment.  Its "back to basics" strategy announced on 8 March 2018 has failed to deliver revenue or EBITDA growth while its balance sheet has continued to weaken."

Risk 6: Difficult and uncertain market conditions: "Even if an effective vaccine against Covid-19 is found, the long term impact of the pandemic on the UK economy is expected to be severe, particularly in property markets which are bound to face significant headwinds due to Brexit uncertainty, the end of the furlough scheme, the end of the stamp duty holiday and the upcoming restrictions on the Help To Buy scheme.  As investors in a standalone business, Countrywide shareholders will be exposed to all of these risks and the Company may not overcome them without significant long term investment, a strong balance sheet and experienced management."

Risk 7: Potential for value-destructive disposals: "There has been press speculation that Countrywide could embark on a strategy of disposals with a view to reducing its bank debt.  The Connells Board believes that a strategy of piecemeal disposals aimed at delivering an estate-agency-only business would damage value and be fraught with risk.  Conveyancing, financial services and surveying are essential to Countrywide's estate agency operation and enable it to offer customers a complete proposition.  Disposing of profitable non estate-agency divisions would deprive Countrywide of complementary defensive units which are important to supporting the entire business, especially during challenging market conditions." 

David Livesey, the Connells Group chief executive, concludes this morning's statement by saying: "Countrywide shareholders have repeatedly been promised jam tomorrow and it has never been delivered.  There is no quick and easy fix for Countrywide.  Turning the business around, especially in unpredictable market conditions, will be a difficult, expensive and lengthy process.  Countrywide needs new ownership, not yet another speculative scheme that is based on hope rather than experience.  Our proposal gives Countrywide shareholders significant immediate upside in cash, at a 72% premium to the undisturbed price, with none of the downside risks of remaining independent."