As reported last week, the REA Group and News International are considering closing Propertyfinder, its UK operations. Since then Nick Leeming, the Founder and Major Accounts Director of Propertyfinder, has been reported as saying that the management team, lead by CEO Gillian Kent, are mounting a rear guard action to save the business by putting together a MBO (Management Buy Out) plan.
The clock is now ticking for the Propertyfinder management team as the REA Group stated that the review of the UK operations would last only 40 days.
Assuming a plan can be assembled in time, what is the plan likely to look like and could a revamped Propertyfinder be profitable?
Any successful MBO will have to look at three things – a new business model for Propertyfinder, the cost of acquisition from the REA Group and News International, and the amount of funding required to take the business to breakeven.
From an outside in basis, the business model will need changes as the current one is losing money. The changes will most be on the expense side as they are probably generating revenues of between £6m and £7m per annum (Source: REA Group ASX financial reports). While these revenues are probably slightly less than FindAProperty and significantly less than Rightmove, they are still probably more than most other property portals operating in the UK who utilise either a pay per lead or freemium approach.
With the right team in place, they should be able to maintain this level of revenues as Propertyfinder has a strong brand in the market, an accepted model and it appears to be generally well liked by agents. As one agent was recently wrote on Property Portal Watch, “I have been with Propertyfinder for at least 6 years now, and out of all the portals they have been the most helpful and passionate about what they do. You know what, it’s not easy working with us estate agents, and they seem to really care and have always been so helpful. I will continue to back them and if there is a management buyout, the better they will get I am sure. The more UK they get, the more I will back them.”
The key focus will be how to operate the business on a greatly reduced budget – perhaps in the order of £5m - £6m per year. To do this, the size of the team and marketing costs will have to be significantly reduced. Finally, there should be further savings as Propertyfinder would not have to carry the overhead costs associated with being part of the REA Group and reporting to News International.
Successful execution of this strategy could see the business move to break even or even profitability within 12 months.
Given the costs of closing Propertyfinder, including the high cost of making 80 or so staff redundant and the costs associated with paying out existing liabilities, it is possible that News International and the REA Group could be happy offloading Propertyfinder.com as a going concern for a nominal amount, as long as the new owners take up all existing liabilities (including the employees).
The alternative could be an asset sale once the employees have been made redundant and all existing liability have been handled. This could be tricky as the assets have value if they are operating (e.g. a brand and its associated URL are valuable if it points to an operating site) and you need people to make the site operate.
As part of any MBO deal, it is likely that the REA Group would continue to have Propertyfinder as part of its international network of sites and therefore they are likely to continue to direct traffic to Propertyfinder. They took the same approach late last year when they closed the New Zealand operations and redirected the URL and links on its sites to realestate.co.nz.
Finally, to move the business to a breakeven or even profitable position, it is likely that significant working capital would be required. This would probably be used to quickly reduce the headcount to the target level and to fund any short term operating requirements. From an outside in perspective, this may be up to £3m.
Therefore, rationally looking at the opportunity, a MBO has merit from the acquirer’s perspective and looks like the best approach for all parties – the employees, the customers, and the sellers – News International and the REA Group.
The challenge now for the Propertyfinder management is to secure funding and sell an MBO approach into the Propertyfinder Board.