Acquisition and IMS

RNS Number : 8971A

LSL Property Services

16 October 2009

 



For Immediate Release

16 October 2009

LSL Property Services plc 

("LSL")

Acquisition of Halifax Estate Agencies Limited ("HEAL")

and

Interim Management Statement

~ LSL to become the second largest estate agency network in the UK ~

LSL Property Services plc, a leading provider of residential property services, is pleased to announce the proposed Acquisition of HEAL, which operates an estate agency network and an asset management business. LSL also announces its Interim Management Statement.

Acquisition Highlights

• LSL will pay Bank of Scotland plc, a subsidiary of Lloyds Banking Group plc, £1 in cash for the entire issued share capital of HEAL;

• The HEAL network, representing 218 estate agency branches, will be absorbed into Your Move, Reeds Rains and InterCounty, making LSL the second largest estate agency network in the UK; 

• Pro-forma net assets of HEAL at 31 December 2008 were £38.4 million, and at Completion will include minimum cash of £22.2 million to cover restructuring and provide an element of working capital;

• LSL will benefit from HEAL's established asset management business with its attractive client base together with a new three year asset management contract with Bank of Scotland; 

• Opportunities for LSL to develop other income streams within HEAL include lettings and conveyancing referrals;

• The acquisition includes the transfer of circa 130 mortgage consultants who will strengthen LSL's position within the mortgage market;

• LSL management has an excellent track record of turning around corporate estate agency businesses;

• The Directors believe the acquisition will be cash positive in 2010 and earnings enhancing in 2011, assuming a modest market recovery;

• Completion, scheduled for 15 January 2010, is subject to Shareholder approval;

• General Meeting to be held in November 2009. 

Interim Management Statement Highlights

• Since 1 July 2009, the Group has performed ahead of management's expectations against a backdrop of a slightly improving housing market;

• Cash generation since the half year remains strong and net debt has reduced by a further circa £2 million.

Roger Matthews, Chairman, commented

"LSL is delighted to announce the acquisition of HEAL, which has a clear strategic and financial rationale with significant benefits to Shareholders. This is a significant opportunity for LSL to acquire a high quality branch network, an established asset management business and pipeline of sales on favourable commercial terms at a low point in the economic cycle. The rebranding of 218 branches to Your Move, Reeds Rains and InterCounty brands will strengthen LSL's estate agency position in local markets, increasing our leverage with suppliers, brand concentration and market share in existing locations. 

"Since the half year, the Group has continued to trade ahead of management's expectations in the context of a market which has improved but continues to be challenging against historic transaction levels. We still remain cautious about the outlook for 2010. While any recovery is likely to be constrained by the availability of mortgage credit and general economic backdrop, we believe that the Group is well placed to deliver significant growth over the longer term when market conditions improve."

For further information, please contact:

Simon Embley, Group Chief Executive Officer Dean Fielding, Group Finance Director LSL Property Services plc	01904 715 324
Richard Darby, Nicola Cronk, Catherine Breen Buchanan Communications	020 7466 5000

Notes to Editors

LSL Property Services plc is one of the leading residential property services companies in the UK and provides a broad range of services to its clients who are principally mortgage lenders, as well as buyers and sellers of residential properties. For further information, please visit our website: www.lslps.co.uk.

Acquisition of Halifax Estate Agencies Limited

1.    Introduction:

The board of LSL is pleased to announce that it has reached agreement with LBG on the terms of the proposed acquisition by LSL of the entire issued share capital of HEAL. HEAL operates an estate agency network and an asset management business and is a subsidiary of LBG.

Under the terms of the Acquisition, LSL will pay BoS, part of the LBG Group, £1 (one pound) in cash for the entire issued share capital of HEAL, which comprised at 31st December 2008, £38.4m of net assets on a pro forma basis. HEAL's balance sheet at Completion will include minimum cash of £22.2m, and Completion of the Acquisition is scheduled to take place on 15th January 2010. This cash is partly provided to cover restructuring and rebranding costs which LSL will incur in connection with the Acquisition.

In view of its size, the Acquisition is a class 1 transaction for the purposes of the Listing Rules and is therefore conditional upon the approval of Shareholders of LSL. A General Meeting of LSL will be held in November 2009 at 45 Moorfields, London EC2Y 9AE for the purpose of approving the Acquisition. The notice convening the General Meeting will be set out in the Circular. The Circular is expected to be sent to shareholders, following its approval by the UKLA, in late October and will also be available on LSL's website: www.lslps.co.uk/investorrelations. Numis Securities Limited is acting as sponsor to LSL in respect of the Acquisition.

2.    Background to and reasons for the Acquisition:

The Directors believe that the Acquisition has a clear strategic and financial rationale, with significant benefits for Shareholders and other stakeholders. The HEAL network, comprising 218 estate agency branches, will be absorbed into the main brands within LSL, namely Your Move, Reeds Rains and InterCounty. The Acquisition also brings HEAL's asset management business into the LSL Group, which the Directors believe is particularly attractive in view of its client base.

The key benefits which flow from this transaction are as follows:

a.    The Acquisition presents LSL with the opportunity to grow further its estate agency business, by acquiring the fourth largest estate agency network in the UK at a low point in the economic cycle, on favourable terms. The quality and productivity of HEAL's branch network is comparable to LSL's own branches. However, its financial performance has been impacted by the relatively high level of corporate infrastructure costs, in particular LBG central recharges and HEAL head office and regional management costs. In addition, the Directors believe that the HEAL business has been run primarily for the distribution of financial services products, which has also impacted on HEAL's ability to trade profitably.  

b.    LSL has a proven track record in acquiring, integrating and turning around a loss making corporate estate agency business, namely the acquisition of Your Move from Aviva in 2004. 

c.    In addition to the HEAL estate agency network, LSL will acquire an established asset management business, which LSL intends to run independently from LSL's existing asset management business, LSL Corporate Client Department, which has developed into a market leader since its launch in 2007. Under the terms of the Acquisition, LSL has negotiated a new three year contract with BoS to provide asset management services to businesses within LBG, which includes a commitment as to volume subject to satisfactory service delivery. The HEAL asset management business also has a number of contracts with other lenders. Further, LSL estate agency branches will also be added to the panel of agents instructed by BoS's own internal retained asset management business.

d.    This Acquisition will make LSL the second largest estate agency network in the UK (based on number of branches), adding 218 branches (including 93 franchised operations), to create a combined network of 584 branches. These numbers include 10 branches in Northern Ireland, providing LSL with an introduction into this market. The Directors believe that this will increase LSL's purchasing power in the market and improve its brand concentration, which should increase LSL's local market share. 

e.    It also presents LSL with opportunities to develop other income streams within the acquired branches, such as lettings and conveyancing referrals, which the Directors of LSL believe are currently under-utilised.

f.    The Acquisition includes the transfer of approximately 130 mortgage consultants who produced in excess of 8,000 mortgage completions in 2008 and, following Completion will operate principally under the Your Move and Reeds Rains brands. The Directors believe that this will increase LSL's importance to key lender clients, which in turn will reinforce LSL's strategic relationships. 

3.    Information on HEAL:

HEAL is the fourth largest estate agency network in the UK (Source: Estate Agency News October 2009), comprising 125 owned branches and 93 franchised branches. It operates its estate agency business within England, Wales and Northern Ireland. HEAL also includes a repossessions asset management unit.  

The HEAL business offers a broad range of services and products, including residential estate agency, asset management, referrals for mortgage advice and insurance arrangements. There are 31 branches that also provide residential lettings and property management services. The business has approximately 1,050 employees, including 130 mortgage consultants. 

The following is a summary of the adjusted profit and loss statement for HEAL for the three years ended 31st December: 

	2008	2007	2006
	£'000	£'000	£'000
Revenue	54,089	96,186	108,476
Operating loss before exceptional (costs)/income and share based payments	(51,108)	(24,610)	(23,693)
Exceptional (costs)/income	(4,463)	328	1,241
Share-based payment charge	(2,538)	(2,398)	(1,897)
Operating loss	(58,109)	(26,680)	(24,349)
Net finance income /(expense)	679	(1,285)	(1,165)
Profit/(loss) on sale of property, plant and equipment	144	22	(23)
Dividend income	974	1,065	0
Gain on sale of investments	54,156	56,900	16,720
Share of post tax profit of a joint venture	192	3,938	1,590
Profit/(loss) before tax	(1,964)	33,960	(7,227)

HEAL's trading to date in 2009, at the operating level, reflects an improvement over 2008 against a backdrop of a slightly improving housing market. The HEAL business has been loss making at the operating profit level, with its profitability adversely affected by the level of recharges of LBG corporate costs and by the HEAL head office and regional management infrastructure costs. In 2008 the cost base included £39.7m of LBG central recharges, £19.4m of head office and regional costs and £4.4m of identified one off costs. The Directors estimate that, by using LSL's own corporate head office and regional infrastructures, it can reduce these running costs (in comparison to HEAL's 2008 statutory accounts) by in excess of £50m per annum.

4.    Principal terms and conditions of the Acquisition:

Under the terms of the Acquisition Agreement, LSL has conditionally agreed to acquire the entire issued share capital of HEAL from BoS for £1. Completion of the Acquisition is conditional on the Resolution being passed at the General Meeting.  Because all relevant staff engaged in HEAL's business are employed by HBOS, rather than HEAL, the Acquisition Agreement includes provisions to deal with the transfer of staff directly into HEAL and LSL's relevant operating subsidiaries.

As the HEAL business is currently loss making, a key part of this Acquisition is that, at Completion, HEAL contains sufficient cash to enable LSL to effectively and efficiently carry out its restructuring and re-branding plans. Included within the completion balance sheet will be a minimum of £22.2m cash which will cover restructuring costs not reflected within the completion balance sheet and provide an element of working capital. These restructuring costs will include re-branding, reorganisation and dilapidations. In addition, the HEAL business includes freehold property with an estimated value of £8m.

The Acquisition Agreement contains indemnities from BoS to cover certain liabilities which may arise in respect of pensions, financial services mis-selling and non-operational premises, to ensure that these liabilities will ultimately remain with LBG following Completion.

The parties have agreed a three month period between exchange and Completion, and LSL intends to commence its migration plans during this period and to have achieved the target operating model by the end of January 2010. 

BoS and LSL have also agreed the terms of a three year asset management agreement, which will commence on the date of Completion, with a commitment with regard to instructions both into HEAL and a three year agreement to instruct into LSL Group's estate agency branches again commencing on the date of Completion.

Further details of the terms and conditions of the Acquisition are set out in Appendix 1. 

5.    Irrevocable undertakings:

Certain major shareholders of LSL, the Directors and certain management shareholders of LSL, representing 56,408,715 shares in aggregate, and 54.16 per cent of the issued share capital of LSL, have given irrevocable undertakings to vote in favour of the Resolution to approve the Acquisition. 

6.    Financial effects of the transaction:

In considering the merits of this Acquisition, the Directors have assumed that conditions in the UK housing market will not improve significantly during the remainder of this year or during 2010. Based on Bank of England mortgage approvals for house purchase data (September 2009), the Directors believe that national transaction levels for 2009 will be less than 600,000 for the full year, which, whilst an improvement on 2008 (512,000), is still considered to be well below normalised levels of circa 1.2m per annum. For modelling purposes, the Directors have assumed a continuation of the current run rate of transaction levels in 2010. 

Based on these market assumptions, the Directors believe that the Acquisition will have a positive cash impact on the LSL Group in 2010, and will be earnings enhancing and cash flow positive in 2011 and subsequent years when market conditions improve. In normal market conditions, in 2007 when housing transaction volumes were above 1.2m per annum, average profits per LSL owned estate agency branch were in excess of £40,000 per annum.

The £22.2m minimum of cash included in the balance sheet of HEAL prior to the completion of the Acquisition will be used to finance (i) the restructuring of the business, (ii) the corporate re-branding of the individual offices, (iii) to cover specific liabilities, such as dilapidations; and (iv) the subsequent marketing launch of the business as part of the LSL Group, which is planned for the first quarter of 2010. The transfer of net assets will create negative goodwill which will be reflected as an exceptional profit in the 2010 accounts. The combination of HEAL's estate agency business with LSL's existing estate agency business together with the strategic benefits of the Acquisition, including, specifically, the new asset management contract, leveraging of the brands and increased purchasing power is expected to result in an improvement in the financial performance of the two businesses in 2010 and beyond. 

7.    Management and employees:

LSL has high regard for the quality of the front line staff within HEAL and within HEAL's asset management business. LSL's intention in respect of the restructuring and subsequent rebranding of the business is to retain the majority of the branch network and branch staff and, following Completion, to be committed to investing in both people and brands.

Currently all employees engaged in HEAL are employed by HBOS and such employees are intended to be transferred into the relevant trading subsidiaries of LSL at Completion. Following exchange of the Acquisition Agreement, the parties will commence a consultation process, covering all aspects of the Acquisition, including the transfer of such employees pursuant to the TUPE Regulations.

There will be no changes to the Board or senior management team of LSL as a result of this Acquisition.

8.    Current trading, trends and prospects:

An Interim Management Statement of LSL for the period commencing from 1 July 2009 is set out at the end of this announcement. 

9.    General meeting:

Completion of the Acquisition is subject to Shareholder approval being obtained at the General Meeting which is expected to be convened in November 2009, following posting of the Circular in late October.  

10.    Recommendation & action to be taken:

The Directors consider the terms of the Acquisition to be in the best interests of Shareholders. Accordingly, the Directors unanimously recommend that Shareholders vote in favour of the Resolution. The Directors, who together own in aggregate 27.5 per cent of the issued share capital of LSL have irrevocably undertaken to vote in favour of the Resolution.  

1 This statement regarding earnings enhancement is not a profit forecast and should not be interpreted to mean that LSL’s future profits, earnings or earnings per share exceed or match those of any prior year.

2 This statement regarding improved financial performance of the two businesses is not a profit forecast and should not be interpreted to mean that LSL’s future profits will exceed or match those of any prior year.

Interim Management Statement

Since 1 July 2009, the Group has performed ahead of management's expectations against a backdrop of a slightly improving housing market.

Turnover for the 8 months ended 31 August 2009 compared with the same period in 2008 was as follows:

• Group turnover for the period was down by 18%

• Surveying turnover was down by 21%

• Estate Agency and Financial Services turnover was down by 16%

In addition, cash generation since the half year remains strong and net debt has reduced by a further circa £2m.

Estate Agency:

Transaction volumes in the estate agency division have continued to stabilise over the summer months and are ahead of expectations. This, together with cost efficiencies commensurate with what are still relatively low activity levels, gives us confidence that our core agency brands, Your Move and Reeds Rains, will perform ahead of our expectations for 2009.

In addition our asset management business and corporate lettings continue to grow market share and deliver profits ahead of expectations.  

Surveying:

The surveying division has continued to maintain its market share in the face of the contraction in the mortgage market. Overall, the volume of mortgage valuations is slightly behind our expectations as a result of further contractions in the re-mortgage market together with certain key clients operating at lower than anticipated levels over the summer months. However, as a result of the cost actions previously taken, the division is well placed for the current environment and well positioned to take advantage of any future upturn in mortgage lending activity.  

Outlook:

Since the half year, the Group has continued to trade ahead of management expectations in the context of a market which has improved but continues to be challenging against historic transaction levels.

We still remain cautious about the outlook for 2010. While any recovery is likely to be constrained by the availability of mortgage credit and general economic backdrop, the Directors believe that the Group is well placed to deliver significant growth over the longer term when market conditions improve.

APPENDIX 1 

SUMMARY OF PRINCIPAL TERMS AND CONDITIONS OF THE ACQUISITION

1.    Pursuant to the Acquisition Agreement, LSL has conditionally agreed to purchase and BoS has conditionally agreed to sell the entire issued share capital of HEAL.

2.    Completion of the Acquisition Agreement is conditional upon the approval of the Shareholders at the General Meeting.

3.    The consideration payable under the Acquisition Agreement is £1.00. There is a requirement in the Acquisition Agreement that HEAL has minimum cash in hand and at the bank on Completion of £22.2m

4.    The consideration of £1.00 is subject to the following post Completion adjustment mechanisms:

4.1    a cash at Completion adjustment, which provides that, in the event that HEAL has less than approximately £22.2m of cash as at the close of business on the date of Completion, as shown in a net current asset statement to be prepared by BoS, BoS shall pay to LSL a sum equivalent to the shortfall on a pound for pound basis on demand; 

4.2    a net current asset adjustment, which provides that if the actual net current asset value is less than the estimated net current asset value by an aggregate amount of £500,000 or more, BoS shall pay to LSL an amount equal to that part of the shortfall which exceeds £500,000. Any payments due by BoS pursuant to this mechanism and the cash at Completion mechanism (at 4.1 above) are subject to a cap of £50m;

4.3    a trading adjustment, which provides some protection to LSL for a material adverse change in HEAL's estate agency activity levels between exchange and Completion. Any payments due pursuant to this mechanism are subject to a cap of £4m; and 

4.4    a redundancy costs adjustment, which provides that if the redundancy costs payable by LSL post Completion are less than such pre-agreed amount, then LSL shall pay to BoS an amount equal to 50% of the difference between such pre-agreed amount and the total redundancy costs.

5.    There is to be a split exchange and Completion with a three month interregnum period, during which period neither LSL nor BoS has any right to terminate the Acquisition Agreement (save in the event that certain completion deliverables are not provided on Completion). The completion date is anticipated to be 15th January 2010.

6.    Both LSL and BoS are subject to pre Completion restrictions and pre Completion obligations that must be complied with during the three month interregnum period and prior to Completion.

7.    The Acquisition Agreement provides for the employees who work in the HEAL business but that are employed directly by HBOS to be transferred to LSL and/or HEAL pursuant to the TUPE Regulations on Completion and LSL agrees to indemnify both HBOS and BoS in respect of any liability arising from, inter alia, any employee's termination of employment by LSL after Completion.

8.    The Acquisition Agreement also provides:

8.1    for warranties (which are not unusual for an agreement of this nature) to be provided by BoS in relation to, inter alia, accounting, franchisees, taxation, property, employment, insurance, litigation, intellectual property and trading matters; 

8.2    for LSL to provide certain warranties to BoS confirming, inter alia, constitutional authority and non insolvency status;  

8.3    for indemnities to be provided by BoS to protect against certain liabilities (which are not unusual for an agreement of this nature)

8.4    that the aggregate liability of BoS shall not exceed £90,000,000 and in respect of a claim under the warranties and/or indemnities, shall not exceed £5,000,000, save in respect of a breach of certain employment warranties, title warranties and warranties relating to the capacity of BoS to enter into the Acquisition Agreement and save in respect of certain indemnities; 

8.5    for usual limits on liability of BoS in respect of claims for breach of warranty under the Acquisition Agreement;

8.6        that both parties will provide non compete and non solicitation covenants which will apply for a period of two years post Completion.

  APPENDIX 2 

SCHEDULE OF DEFINITIONS

"Acquisition"	the proposed acquisition by LSL of the entire issued share capital of HEAL pursuant to the Acquisition Agreement
"Acquisition Agreement"	the conditional share sale and purchase agreement in respect of the Acquisition dated 16 October 2009 between, inter alia BoS and LSL relating to the Acquisition the principal terms of which are described in Appendix 1 of this announcement
"Board"	the board of directors of LSL
"BoS"	Bank of Scotland plc, a company registered in Scotland with number SC327000
"Circular"	the Circular to be sent to Shareholders in connection with the General Meeting
"Completion"	completion of the Acquisition
"Directors"	the directors of LSL
"FSMA"	Financial Services and Markets Act 2000
"FTE"	full time equivalent employees
"General Meeting"	a general meeting of LSL which is expected to be held in November 2009 for the purpose of approving the Acquisition
"HBOS"	HBOS plc a company registered in Scotland with number SC218813
"HEAL"	Halifax Estate Agencies Limited a company registered in England and Wales with number 20445933
"Intercounty"	ICIEA Limited a company registered in England and Wales with number 2045933
"LBG"	Lloyds Banking Group plc a company registered in Scotland with the number SC095000
"LBG Group"	LBG and its subsidiaries
"Listing Rules"	the listing rules made by the UKLA for the purposes of part VI of FSMA
"LSL" or "Company"	LSL Property Services plc a company registered in England and Wales with the number 05114014
"LSL Group" or "Group"	LSL and its subsidiary undertakings
"Reeds Rains"	Reeds Rains Limited a company registered in England and Wales with number 5114014
"Resolution"	a resolution to approve the Acquisition to be proposed at the General Meeting which will be set out in the notice of the General Meeting at the end of the Circular
"Shareholders"	the shareholders of LSL
"TUPE Regulations"	the Transfer of Undertakings (Protection of Employment) Regulations 2006
"UKLA"	the UK Listing Authority
"Your Move"	your-move.co.uk Limited a Company registered in England and Wales with number 01861469

Numis Securities Limited, which is authorised and regulated by the Financial Services Authority, is acting for LSL Property Services plc and for no-one else in connection with the contents of this document and will not be responsible to anyone other than LSL Property Services plc for providing the protections afforded to clients of Numis Securities Limited, or for providing advice in relation to the contents of this document or any matters referred to herein.  

 

END

 

 

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