Connells Countrywide: A Bail Out For One. But Suicide For The Other?

Yesterday, December 31st, Countrywide PLC announced to the London Stock Exchange that their shareholders had voted to accept a further, revised offer from Connells to acquire them at a share price of ￡3.95.

I've been asked a number of times in the last 24 hours what I think of the deal and my answer has been that it's the only option for CWD given the mess that Peter Long and Paul Creffield have made of the business in recent years, enabled by complacent and inept senior shareholders. After all, they only had two other alternatives given losses of late of ￡400m - get taken private at a lower share price by the private equity entity Alchemy, wiping out most existing shareholders completely. Or, face administration.

For CWD, this is a decent deal. In fact it's the only deal. And at last, being taken in by a private company will mean no further, humiliating public scrutiny.

Investors in CWD will come out ok especially those that were in at the beginning and those that have weighed in over the past few months. Anyone in between, not so much.

So, Countrywide gets rescued from the clutches of disaster by a well-meaning competitor. However, there are a few things to consider before this story is put to bed as great all round:

1) If you think that Connells will preserve all jobs and branches, you're naive. The whole point of a merger is to gain financial advantage. Yes, that means buying goodwill, customers, revenue and 'territory' which will be (kind of) the case here but that also means economies of scale.

In my view this has to mean branch consolidation for two reasons. A) because Connells will surely look at poor performing, grossly unprofitable CWD branches and their 'excess' brands and shelve them - also to recoup some money from LSH, Greene and Co and the like. And B) will also map their existing network against the acquisitions and consolidate where there is overlap.

Moreover though, why employ two regional managers or directors to oversee offices that are close together? That makes no sense. And what of head office staff? Connells have already acknowledged in their comments to the City yesterday that 'some efficiencies' will be made. But what does 'some' mean? Again, why run the expense of two Marketing Directors and two Operations Chiefs? But also, two marketing teams, two IT teams, two HR teams and so on.

There will be blood. And it won't be a little.

2) Is this the right thing for Connells in the face of modern commerce? They may be giants of the estate agency industry and, probably, the best run high street business in the sector - but the business is changing and it seems incomprehensible that actually expanding branches and related overheads is at all sustainable when defensible future growth is, in my view, in pushing non-branch based estate agency.

Recent months have flattered us all with a 50% uplift, on average, in SSTCs. But that won't last. And once the Covid dust has settled, we'll be back to office rents only increasing year on year, the same with business rates, utility costs, cars and, obviously, wage costs. The more branches there are, the more people are needed to keep them open come rain or shine.

'Investing' in a bricks and mortar footprint on an even more 'micro' basis a la the 1970's where small territories are served by individual offices, goes against the grain of modern unit-economics and is unnecessary in order to grow an estate agency business now. Branches are largely superfluous. Not all of them, granted - but to have over 1000 as Connells Countrywide seem to indicate they will retain and that will still only cover 50% of the UK or so? That's madness, in my opinion. Suicide even in the medium to long term. Just ask Thomas Cook, the insurance industry and so on.

Connells may therefore have bitten off more than they can chew here. Unless the plan is, indeed, to close most offices and retain brand awareness by promoting CWD brands without physical offices - as indeed they should.

3) Mergers are horrible. Culture, tech, brand, senior staff... Slamming two companies together is not easy nor risk free. Ask anyone that has actually done it. Yes, CWD and Connells are the 'same' in that they do the same thing in the same places. But that doesn't mean that they are the same - certainly not in terms of operational procedure, culture, vision, systems, tech, marketing and so on. The two things that I wager will be underestimated by Connells are i) culture and ii) technology integration. Both are wild animals when it comes to morphing one into the other.

Note: Harvard Business Review reckons that 70% to 90% of mergers fail. Is this a merger rather than an acquisition? The two are interchangeable.

In summary, post-honeymoon and under the cover of being a private company, this deal may prove not to be quite the sweetheart that it's initially being peddled as.

Like many marriages it may well end badly.