The private equity firm that plans to acquire real estate giant Realogy Corp. also played an integral role in building up its business.
NRT Inc., a subsidiary of Realogy Corp. that oversees company-owned brokerage operations, was formed in 1997 through a $232 million venture by a group affiliated with Apollo Management L.P. and by HFS Inc., a predecessor to Realogy’s former parent company. HFS reportedly invested $157 million of the initial financing for NRT while Apollo invested $75 million. Realogy this year was spun off from former parent Cendant Corp. as an independent, publicly traded company.
“Apollo Management was actually the original private-equity sponsor of NRT — the vehicle that catapulted NRT into existence in the first place,” said Chuck A. DelGrande, managing director of corporate advisory services for Presidio Financial Partners LLC, a financial advisory company.
The planned deal between Apollo and Realogy, worth about $9 billion, is still subject to a shareholder vote and to antitrust and other reviews. Realogy owns brokerage companies and franchises such major real estate brands as Coldwell Banker, Century 21, ERA and Sotheby’s International Realty.
DelGrande said the announcement follows a trend in private equity buyouts of well-known companies. Apollo has also been involved in a buyout offer this month for Harrah’s Entertainment Inc., the world’s largest casino company, for example.
The planned Realogy acquisition, which would take the company private, should lead to more freedom in long-term planning for the company, DelGrande said. “The publicly traded firms today by and large live and die by their quarterly earnings announcements,” he said.
And while private company investors still demand earnings performance, DelGrande said private companies have a little more flexibility in managing business plans, and are not required to “be so focused on hitting their targets.”
DelGrande said the planned move by Apollo shows confidence that the real estate market will soon recover. “They are betting on the recovery in the sector,” he said. He noted that officials at Apollo Management have “had a longstanding relationship and … an appreciation of the depth and breadth of management that was Cendant and is now Realogy.” Apollo and NRT “have done quite well” through the success of Cendant, he added.
Apollo has committed to provide $2 billion in equity to complete the planned transaction, according to a Realogy announcement, and the deal also includes Apollo’s assumption or repayment of $1.6 billion of net indebtedness, and legacy contingent and other liabilities valued at about $750 million. Founded in 1990 and based in Purchase, N.Y., Apollo is now investing in its sixth private equity fund and has invested more than $16 billion in companies from a broad range of industries.
“Based on the announcement itself, the bet that Apollo is taking is a firm-specific bet and a business-model bet, all with positive checks in the box,” DelGrande said. Realogy has managed to remain a prominent industry player as the industry has evolved, and Apollo is betting that Realogy’s management will continue to adapt and evolve to changing times, he also said.
Kenneth Jenny, CEO and managing partner for real estate consulting company tranCen and a former executive for Coldwell Banker, said Realogy’s real estate brands have been through many ownership changes over the years, and he expects franchisees to weather any new change in ownership without much trouble.
“I don’t think any consumers or franchisees would see this as a major impact,” he said. Several of Cendant’s brands have been through several ownership changes. Coldwell Banker, for example, celebrates its 100th anniversary this year and has been owned by a string of companies, including Sears, HFS and Cendant — the brand has alternated between private-company and public-company ownership several times.
Jenny said he expects there will be a hard look at the differences between NRT’s company-owned brokerage offices and Realogy’s franchise business, which he said is like “apples and oranges.”
He said there is precedent for other large real estate brokerage companies to sell company-owned offices off as franchises — the business of franchising can be more rewarding and less risky than ownership, Jenny said.
“I wouldn’t rule out Apollo saying, ‘Why don’t we … sell these operations back to local operators.’ The most successful business in real estate has been real estate franchising,” Jenny said. “I would say that anyone analyzing the total Realogy group now would say, “Hmm, these are really different types of businesses under one umbrella.”
It’s always good to have deep pockets behind a business, he also said, noting that richly capitalized companies helped the Coldwell Banker and Prudential brands to grow, as an example.
Managers at Realogy, Jenny said, have done a “a better job than a lot of franchises have done to control this industry,” and the challenge if the Apollo acquisition is approved is to help “sustain it and maneuver it through the market.”
The price per share of Realogy Corp. stock was trading at $30.40 as of 1:38 p.m. Eastern Time today, which is up $4.90 compared to the previous closing price.
