Apollo Group's Bid For Realogy Undervalues The Company

by: Brian Harper, CFA

Realogy (NYSE:H) announced yesterday that they will be acquired by Apollo Management for $30/share in cash, or around $6.65 billion in equity value and an enterprise value of $9 billion.

Realogy management conceded that:

"The valuation takes into account the substantial pressures and uncertainties facing the residential real estate markets that may well continue for some time."

Funny that the first time we hear a statement like this from them, it is attached to an agreement to sell the company. We certainly didn't hear such pessimism when they were promoting the break up of Cendant.

What is really happening here is Henry Silverman, the tenured CEO scheduled to step down at the end of 2007, wants to cash out. He is ready to be done with it. As a result, shareholders are being offered a near fire-sale price, at a time when many real estate company valuations are depressed.

Realogy noted that the enterprise value represents around 11 times pro-forma 2006 EBITDA. That sounds like a decent price, but comparables for 2006 are looking terrible, even relative to years less ebullient than 2005. Realogy had EBITDA of $1.12 in 2004 and $1.18 billion in 2005. So EBITDA this year is expected to be down 30% year over year. While much of this relates to a slower residential market, EBITDA will likely rise by closing some weaker offices and cutting fat in other places.

Fortunately, Realogy is free to entertain offers from other suitors, subject to a break up fee of around $99 million, or around $0.45/share. We expect a higher price, and the market seems to agree, with shares trading above the $30 buyout price. We would be disappointed in anything less than $36.

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