Faced With Growing Wall Street Scrutiny, Realogy Considers Going Private

Excerpt from our One-Page Annotated News Summary:

Stepping Out on Its Own, Real Estate Broker Finds Unfriendly Streets (NY Times)

Summary: Since being spun off from Cendant Corp., in July, Realogy Corporation's (H) shares have dropped more than 10 percent in the midst of a widespread and deep housing crisis (in August, home prices fell for the first time in 11 years). The company, which owns several real estate franchises including Coldwell Banker, Century 21, ERA and Sotheby’s International Realty is three times larger than its next largest competitor, RE/Max International and reported earnings of $1.2 billion last year for a profit margin of 16%. But with the end of one of the nation's best real estate booms in decades coinciding with Realogy's introduction as an independently-traded public company, there has been much speculation that Realogy will throw in the towel and de-list soon. This would allow the company more operating flexibility, without being under the constant close scrutiny of Wall Street. While the company has offered a tender to buy back 20% of its outstanding shares, private equity firms have been positioning themselves to snap up the company, which has little debt and a solid profit margin. CEO and vice-chairman Richard A. Smith believes it is still to soon to put the company onto the private market, considering the tax liabilities it would face if it were privatized too soon after its tax-free divestiture from Cendant. Says Mr. Smith, “Remember, the reason we did this [the Cendant breakup] was to increase shareholder value. The board will be obligated to consider taking Realogy private if the stock continues to struggle but it’s too early to come to any of those conclusions.”
Related links: Full article • Housing Bubble and Real Estate Market Tracker • Does Realogy Contain Real Value? • Cendant Lobs Up a Fat Pitch in the Form of Realogy Corp. • Cendant Spinoffs: Which One's Worth Owning? • Why I'm Long Realogy • FTC Action Strengthens Online Real Estate Sites
Potentially impacted stocks and ETFs: iShares Dow Jones U.S. Broker/Dealers (IAI), PowerShares Dynamic Building & Construction (PKB), SPDR Homebuilders (XHB), iShares Dow Jones U.S. Home Construction (ITB)

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Comments

[Paul Meisel]

Why is 14 times earnings a disappointment in valuation, considering that housing sales are in a slump?

[JonathanLiss, SAEditor]

Seems to me (I only summarized the article, I didn't write it) that the disappointment relates to the way Wall Street has been treating the company in the wake of the housing slump. The company (or Cendant board actually) had hoped to raise its value for investors; instead it is down 10%. Also, the company may end up with earnings of just $800 million for FY 2006- a decrease of 33% from last year. Still, they're staying the public route for now which means when the slump ends, their current value can actually represent quite a discount.