Realogy Sale Not Necessarily A Done Deal

The widely reported purchase of Realogy by Apollo Management LP last week may just be the opening move in a wild and wooly auction for the company.

Realogy is a spin off of the real estate interests of Cendant Corporation which carved itself up into four pieces earlier this year, creating Realogy and a second company to run the Wyndham Hotel chain. Cendant's travel services division was sold and the remainder of the company was renamed the Avis Budget Group to reflect its ownership of the two rental car giants.

Realogy is the 500 lb gorilla of the real estate business. A Realogy company was involved in the purchase or the sale of one out of four homes trading through a real estate agent in the United States in 2005. And most American homeowners have never heard of the company.

But they have heard of Century 21 Real Estate, ERA, Sotheby's, and Coldwell Banker.

Century 21 is one of the largest residential real estate franchisors with approximately 7,900 franchised offices and 143,200 sales associates in 42 countries and territories.

Coldwell Banker is another major franchisor with around 4,000 franchise and corporate owned offices and 125,400 agents in 30 countries and territories.

Coldwell Banker Commercial has 160 franchise offices and 1,400 sales associates worldwide.

ERA is yet another real estate franchisor with 2,800 franchise and company owned offices and 36,600 sales associates in 30 countries.

In addition to these, Realogy also owns the Sotheby's brand of luxury real estate brokerages and Cartus Corporation which specializes in corporate relocation services.

Perhaps the crown jewel in the Realogy family is NRT Real Estate. This subsidiary, the largest real estate company in the U.S. and the 12th largest commercial real estate concern owns and operates 1,000 real estate offices, largely ERA, Coldwell Bank and Sotheby's franchises as well as mortgage and title companies. In 2005 it closed $230 billion in sales and participated in 493,000 real estate "sides."

The ink has hardly had time to dry on Realogy's incorporation papers. Cendant began the spin off in mid-summer and Realogy's stock began to trade on the New York Stock Exchange on August 1. The company began to immediately disappoint. It announced third-quarter 2006 earnings of $87 million compared to $227 million for the same period in 2005. Revenues were down 16 percent and home sales dropped 22 percent. Much of this, of course, was the result of the declining housing market but stockholders were not happy. When the company was spun off the new shares began trading at around $26 but were down to less than $20 by September.

Apollo is no newcomer to the Realogy family. It participated with Cendant in founding NRT in 1997 but Cendant bought out its interests in 2002. Apollo plans to take Realogy private and is offering stockholders $30 per share. This is a buyout of approximately $6.6 billion and Apollo will also assume around $2.4 billion in Realogy debt.

The Wall Street Journal quoted Realogy Chairman (and Cendant founder) Henry Silverman as stating "The view of the (Realogy) board is that companies with declining earnings and no visible growth should be private. (Buyout shops) have a much longer-term view. The people who own our stock have a five-second view."

But, the sale to Apollo may be far from a done deal. Kevin DeMarrais, writing for NorthJersey.com, the website for the North Jersey Media Group, (Realogy is headquartered in Parsippany, NJ) stated that some stock analysts feel that Apollo is getting a bit too much of a bargain at $30 per share. The company has until February 14 to entertain other offers and DeMarrais quotes $35 as a more reasonable price. Stockholders apparently feel that a better offer may come before their way but they don't seem to feel it too strongly. The stock was selling at $30.72 late Tuesday afternoon. Silverman, with 34.7 million shares of Realogy stock when new shares were issued in July, would probably be open to better offers.

So what happens if Realogy is taken private? As Silverman said, the pressure for profits will ease off at least temporarily. Beyond that, probably nothing will change that the home buying public will notice. For real estate professionals, however, it might be a different ball game. Perhaps the new owners will decide that four brand names are too many and begin a slow phase-out of the smaller and less successful one or two. Franchise fees (usually assessed on every commission check) or administrative fees could increase; corporate support of franchisees in the form of national advertising could shift, or maybe nothing will change at all. Perhaps the new owners merely plan to wait out the current slow market and emerge fat and sassy with the next bubble.