Foxtons has been accused of failing to take advantage of a buoyant housing market and should put itself up for sale to realise value for shareholders, according to an investor in the firm which is launching the second activist attack on Foxtons in nine months.

Converium Capital, a Montreal-based investment fund, has built a stake of around 2% in Foxtons over the past six months, but is unhappy with the way in which the company is being run, despite the fact that Foxtons delivered a much improved performance in latest trading update.

Michael Rapps, managing partner of Converium, urged Foxtons to exit the public markets in a letter sent to the company’s chair, Nigel Rich, and seen by Property Industry Eye – read below.

Foxtons shares have fallen 49% in the 12 months to date, and 85% since its IPO in 2013 at 230 pence a share.

“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,” wrote Rapps.

“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,” he added.

Converium is not the first activist to criticise Foxtons and the way the company is run. The estate agency was heavily criticised by shareholders last year, 40% of which voted against the approval of an April remuneration report which gave chief executive Nic Budden a cash bonus of £389,000 and shares worth £569,000.

Hosking Partners, Foxtons’ largest shareholder with an 11% stake in the company, has called for “radical change” to the board.

Catalist Partners has also been calling for a change – in strategy. The activist investor published a dossier in May last year urging Foxtons to target expansion outside of London, with a view to increasing the agent’s market valuation.

Foxtons declined to comment.

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.

*****

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

Foxtons reports much improved performance as profits soar