Hopes of a UK housing market recovery continue to drive up shares in housebuilders and property marketeers. There's increased mortgage lending and UK consumer confidence is improving amid economic recovery. This feel-good factor has certainly made it a conducive environment for London estate agent Foxtons to finally float on the stockmarket following years of speculation over its intentions to become a listed business.
Foxtons is a well-known name in the Capital and will certainly create a lot of interest when it joins London's main market in September. A mooted £400 million to £500 million valuation would put the company at the low end of the FTSE 250. The exact date of next month's float has yet to be determined, so it is probable that Foxtons will miss the September index reshuffle and only be eligible for inclusion in the mid cap index in the December switch.
The group was founded in 1981 and operates 42 branches – all in London apart from two in Surrey. It wants to expand in London with five to 10 new branch openings per year between 2014 and 2018. The highly-cash generative business made £38.3 million earnings before interest, tax, depreciation and amortisation (EBITDA) in 2012 on sales of £120 million.
It wants to raise £55 million through issuing new shares, so that it can use this money and existing cash to pay off its entire debt.
On paper, that looks an attractive proposition. Yet the group does has a terrible reputation for poor customer service. The internet is awash with negative consumer comments about the business. Indeed, Foxtons is well known for its aggressive sales tactics. That will certainly alienate a lot of potential investors.
There's also the point that the London property market has been strong for a long time, so you could argue that better value generation could be had by putting money into companies set to benefit from any regional recovery in the housing market. Yet Foxtons argues in today's intention to float announcement that it is highly geared to any market recovery, even though it is only focused on the Capital. It says between 2008 and 2012, average annual residential property sales transaction volumes in London were approximately 55% of the 2000 to 2006 average levels, closely in line with trends across the whole of England and Wales.
We looked at the likely beneficiaries of a housing market recovery a few weeks ago in Shares.
Private equity firm BC Partners bought Foxtons in 2007 at the top of the market. It is now selling its stake. Executive directors and estate agent staff are also allowed to sell part of any holdings in the business in the float.
With any private equity-related float, investors should always question why the investor wants to sell. If a company has excellent growth prospects, then surely it is better to stay invested in a company. While BC Partners will still have a (smaller) stake in the group, investors shouldn't lose sight of the fact that private equity exits can be very risky. The departing investor is likely to be the one making the money and new investors often end up buying something that is fully priced, or certainly very close to it.