Foxtons has this morning announced the simultaneous disposal of the D&G sales business and all of its branches, by way of the sale of Douglas & Gordon Limited, and the integration of the D&G lettings business into the Foxtons network.
Less than 12 months after buying D&G, the London agency says it sees the acquisition of lettings books and businesses as a key part of Foxtons strategy and the Group has, in the last two years, successfully acquired and integrated a number of these businesses.
Foxtons acquired D&G in March last year, a high profile London estate agent with a large lettings business, which comprised the majority of the company’s revenues, and a loss making sales business. It was purchased for total consideration of £15.5m, with a cash balance of £3.9m left in the business which was in excess of its working capital requirements and known liabilities. This was an attractive valuation which ascribed no value to the D&G sales business.
Foxtons says the D&G lettings business has performed well in 2021, with the lettings portfolio growing by 4% to around 3,000 live tenancies and generating £10.0m of lettings revenue in the ten months of Foxtons ownership. The D&G sales business has also grown since acquisition, having benefited from, among other things, improved market conditions. Despite much improved sales revenues however, the D&G sales business contributed an operating loss of approximately £1.9m to the Group in 2021, from £6.8m of sales revenue. The total gross assets of the D&G sales business at the end of December 2021 were £10.6m, primarily relating to lease right of use assets and cash.
The Board reviewed a number of options for addressing the profitability of the sales business, including continuing to run D&G as a separate brand, closing down the D&G sales business and disposing of the D&G sales business. After consideration, the Board concluded that disposing of the sales business to D&G management and integrating the lettings business into the Foxtons network was the most attractive option. This is primarily because Foxtons has an established branch network which overlaps significantly with D&G’s branches.
The D&G lettings business will be integrated into the Foxtons infrastructure and all of D&G’s talented lettings employees will transfer to Foxtons, providing landlords and tenants with continuity and consistency of service as well as providing the employees with enhanced career opportunities.
As reported in the Group’s 2021 interim results, total consideration for D&G of £15.5m reflects the headline price paid of £14.25m, on a cash and debt free basis, plus payment for excess cash at the point of completion.
The simultaneous Disposal and integration of the D&G lettings business into the Foxtons network are expected to deliver the synergies identified by Foxtons at the time of the original D&G acquisition and the D&G lettings book is expected to deliver operating profit of around £4m in 2022. This is an increase of over £2m on the operating profit contributed by the whole D&G business in 2021 and is in line with our expectation at the time of the acquisition that it would be materially earnings enhancing in 2022.
After considering all costs associated with the original D&G acquisition and the Disposal, the Group will have paid approximately 3.9 times its expected 2022 operating profit for the D&G lettings business, which management believes is an attractive valuation. The total return on invested capital is expected to be in excess of 20% in 2022.
The Disposal will result in an impairment loss of approximately £3.0m, which will be recognised by the Group as an adjusted item in the financial statements for 2021.
Terms of the transaction
The D&G sales business is being disposed of for nominal consideration to its current CEO, James Evans. Cash of £3.7m will be left in the business to cover working capital requirements and retained liabilities, which would otherwise have had to be incurred by the Group.
Under the terms of the Disposal, D&G will operate under restrictive covenants which protect the lettings book assets retained by Foxtons, including existing customer contracts and relationships, and the employees that are transferring to Foxtons.
Related Party Transaction
James Evans is a Director of D&G, which is a subsidiary undertaking of the Group, and he therefore constitutes a related party to the Group under Chapter 11 of the Listing Rules. Therefore, as required by the Listing Rules, the Disposal is conditional upon the approval by shareholders at a General Meeting. A circular setting out the terms of the Disposal is expected to be posted to shareholders on Monday 17 January 2022 with the General Meeting expected to take place on Thursday 10 February 2022. Following a period of consultation with affected employees, and if approved by shareholders, the Disposal is expected to complete in February 2022.
Foxtons CEO, Nic Budden commented: “D&G has performed extremely well over the last ten months under Foxtons ownership and this next step is a real win-win for both parties to the transaction. We have an excellent track record of acquiring and integrating lettings businesses and expect to deliver significant growth in operating profit through the integration of the D&G lettings business into Foxtons highly scalable infrastructure. The D&G sales business will remain as an independent brand under its current leadership and we wish them well for the future.”
D&G CEO, James Evans commented: “I am thrilled to have the opportunity to lead D&G as an independent brand and excited by the prospect of continuing to grow the business and serve our customers as we have done for many years. Foxtons is a fantastic business, I spent many happy years there myself and I know that our transferring staff and clients will have the same great experience I had. I would like to thank our transferring clients and staff for their loyalty, business and hard work over the years and wish them all the very best.”