MONTREAL, Quebec--(BUSINESS WIRE)--Converium Capital Inc. (“Converium”), a multi-strategy investment firm, yesterday sent a letter to the Board of Directors of Foxtons Group plc (LON: FOXT) (“Foxtons” or the “Company”) urging the Company to commence a formal sales process.
Foxtons is the leading real estate agency in the London, UK market with lettings, sales and mortgage broking activities. Foxtons currently manages more than 25,000 tenancies in London, operates one of the largest sales agencies in London, and is actively growing its Alexander Hall mortgage broking business.
The full text of Converium’s letter is below.
March 15, 2022
Board of Directors
Foxtons Group plc
Building One, Chiswick Park
566 Chiswick High Road
London W4 5BE
Attention: Nigel Rich, Chairman
Dear Nigel,
Funds managed by Converium Capital Inc. (“Converium” or “we”) are currently investors in Foxtons Group plc (“Foxtons” or the “Company”). At Converium, we seek to identify companies that have fundamentally sound operating businesses but have some identifiable issue weighing on their valuation. We strive to work collaboratively with management teams and boards to develop creative solutions to resolve the underlying valuation overhang and to maximize value for stakeholders.
Over the last several months, we have engaged with members of Foxtons’ management and Board about opportunities to increase shareholder value, including reducing the Company’s cost structure with the goal of returning margins to historical levels, implementing revenue-enhancing initiatives, divesting select non-core businesses and repurchasing shares.
We have appreciated your willingness to engage with us, your candour and your acknowledgement of the need to enhance value at Foxtons.
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Foxtons has an exceptional legacy and brand name and is a clear leader in the London property market. The Company’s balance sheet is strong, with no debt and significant cash on hand. Foxtons benefits from a capital-light and inflation-protected business model, high contribution margins and significant operating leverage. As the London property market has started to rebound following its Brexit and Covid-19 induced malaise, Foxtons ought to have risen to its potential.
Unfortunately, Foxtons has continued to underperform. Over the last several years, the Company's margins have markedly declined. Whereas Foxtons historically generated operating margins1 of more than 30%, over the last five years the Company’s operating margins have oscillated between nil and 10%. Last year, the Company realized a 7.7% operating margin on £126 million of revenue compared to an 18% operating margin on a similar £132 million of revenue in 2016.2 We believe much of this margin erosion is due to insufficient cost controls.
Foxtons’ operational underperformance is compounded by poor capital allocation. Most notably, Foxtons issued £22 million of equity at 40p in April 2020, notwithstanding that the Company had no debt, an undrawn credit line, £21 million of cash on hand and access to various government assistance schemes. Seven months later, the Company commenced a share buyback and, between November 2020 and December 2021, Foxtons repurchased £6 million of equity at an average price of 54p, or 35% more than the price at which it unnecessarily issued shares just a few months earlier. More confounding still, Foxtons stopped repurchasing shares until last week, despite ample cash on hand and a share price that was 40% lower than the average repurchase price last year.
The combination of poor operating performance and poor capital allocation has, unsurprisingly, resulted in poor share price performance. At the time of Foxtons’ IPO in September 2013, the Company had a market value of £753 million compared to £99 million today. Shareholders have lost more than £650 million, or 87%, of their investment over the last eight and a half years.
Foxtons' shares today trade at roughly the same price as during their Covid-19 nadir, despite having higher revenue, profit and free cash flow compared to the three years leading up to Covid-19. The current share price implies a valuation of roughly 8x highly depressed operating earnings, which in our view is too low for a capital-light business like Foxtons. Put simply, investors lack confidence in the Company's ability to deliver acceptable financial returns.
*****
Where does Foxtons go from here?
We have evaluated whether the Company, on its own, can materially improve its operational performance and regain its historical margins. Unfortunately, we doubt that it can.
We have shared many ideas with the Company to increase profitability and shareholder value. We know other shareholders have done the same. Few, if any, of these ideas have been pursued. Even if the Company were to develop a credible plan to materially improve results, implementing such a plan would take time to bear fruit and be subject to significant execution risk. For instance, the Company’s plan to hire additional negotiators and mortgage brokers this year is anticipated to generate first profits in 2023. That means investors will need to wait until 2024 to see any potential benefits from this initiative.
Converium believes that the better path for Foxtons is to pursue a formal process to sell itself, and we believe that in a sale Foxtons should command a significant premium over today’s depressed share price.
Foxtons offers a buyer the most recognized estate agency brand and the largest lettings book in London. A buyer would also benefit from several growth opportunities, including expanding Foxtons’ sales business to the affluent London commuter belt and other UK cities, and further cross-selling its property management services to its lettings book clients.
As the estate agency industry consolidates, Foxtons also provides a buyer with meaningful cost synergies. We believe a strategic buyer could achieve more than £10 million of cost savings across public company costs, duplicative management, back office and technology costs, and potentially overlapping branch networks. The synergies alone could be worth more than Foxtons’ current market value.
In 2021, Foxtons generated £9.8 million of operating earnings.3 With improved property market conditions and a modest amount of cost savings, Foxtons could reasonably generate £11.5 million of operating earnings in 2022. The Company’s planned £8 million of lettings book acquisitions this year should increase operating earnings further to £13.5 million on a run rate basis. Assuming a valuation multiple of 10-12x post-synergy operating earnings, a sales process could yield a sale price of 80-100p per share or a 200% premium to the current share price. This valuation is despite standalone financial results that remain far below Foxtons’ historical results and attributes no value to the growth initiatives outlined above.
We note that Foxtons’ competitor Countrywide plc (“Countrywide”) underwent a similar process in 2020 following several years of operational and financial struggles. After trading at 50p during Covid-19, a bidding war emerged for Countrywide that eventually resulted in Connells Limited acquiring Countrywide for 395p per share.
*****
We believe Foxtons has tremendous potential. However, extracting such potential will take time, investment and capability, and is subject to execution and other risks that are outside the Company’s control.
Investors today are focused on Foxtons’ deficiencies because the Company has not put forward a credible plan to reverse its underperformance, nor instilled confidence in its ability to execute on any such plan. A formal sales process is likely to highlight the opportunities available to the Company, its standalone intrinsic value, and its strategic value to buyers.
We urge Foxtons’ Board of Directors to pursue a value-maximizing sales process, and we remain available to discuss any of the above with you at your convenience.
Best regards,
Michael Rapps
Managing Partner
About Converium Capital
Converium Capital is a multi-strategy opportunistic investment firm. Converium aims to deliver positive and uncorrelated returns regardless of macroeconomic conditions by investing in distressed and event-driven opportunities globally and across the capital structure.
Disclaimer
Neither this announcement nor the letter it relates to constitute an approach regarding a possible offer for Foxtons, and Converium is not actively considering any such offer and is not acting in concert with any person considering such an offer. Accordingly, neither this announcement nor the letter it relates to should have any consequence under Rule 2 of the Takeover Code.
Converium is making this announcement for general informational purposes only, and it is not intended to be and does not constitute or contain any investment recommendation as defined by Regulation (EU) No 596/2014 (as it forms part of the domestic law in the United Kingdom by virtue of the European Union (Withdrawal) Act 2018). Nothing in this announcement is a statement of or indicates or implies any specific or probable value outcome in any particular circumstance. This announcement is not intended to be, nor should it be construed as (1) investment, financial, tax or legal advice, or (2) a recommendation to buy, sell or hold any security or other investment, or to pursue any investment style or strategy.
The information or opinions contained in this announcement do not constitute an inducement or offer to purchase or sell or a solicitation of an offer to purchase or sell any securities or other investments in Foxtons. Any person who is in any doubt about the matters to which this announcement relates should consult an authorised financial adviser or other person authorised under the UK Financial Services and Markets Act 2000. The views expressed by Converium in this announcement represent the subjective opinions of Converium. To the best of Converium's ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources that Converium believes to be accurate and reliable. However, such information is presented “as is”, without warranty of any kind, whether express or implied. All expressions of opinion are subject to change without notice, and Converium does not undertake to update or supplement any of the information, analysis and opinion contained herein.
In relation to the United Kingdom, this announcement is being issued only to, and is directed only at, (i) investment professionals specified in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 as amended (the “Order”), (ii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order and (iii) persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any securities of Foxtons may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “Permitted Recipients”). Persons who are not Permitted Recipients must not act or rely on the information contained in this announcement.
Converium currently has an economic interest in the securities of Foxtons. It is possible that Converium's interest will conflict with Foxtons and other parties' interest and there may be developments in the future that cause Converium to modify this economic interest at any time or from time to time. This may include a decision to sell all or a portion of its holdings of such securities in open market transactions or otherwise (including via short sales), purchase additional such securities (in open market or privately negotiated transactions or otherwise) or trade in options, puts, calls or other derivative instruments relating to such securities. Converium also reserves the right to take any actions with respect to its investment in Foxtons as it may deem appropriate, including, but not limited to, communication with the board of directors, management and other investors.
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1 Converium calculates operating margin as earnings before interest, taxes and amortization of intangibles from lettings book acquisitions divided by revenue.
2 Converium estimates Foxtons’ operating margin in 2016 would have been 15% (still about double 2021 margins) when adjusting for tenant fee income that Foxtons earned in 2016 and which it is no longer permitted to charge.
3 Converium calculates operating earnings as earnings before interest, taxes and amortization of intangibles from lettings book acquisitions.
