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Countrywide under the hammer after massively discounted share issue

"Borrowings up, profits down" is not what the estate agent's lenders would call a win-double and the group has been forced to issue shares at 10p - about one-fifth of last night's closing price - to keep it afloat, mollify its lenders and provide a bit of breathing space to execute the turnaround plan.

Letting agent brands owned by Countrywide
Everyone knew an emergency fund-raising was on the cards but the size of the discount has shocked the City

Shares in cash-strapped estate agents group Countrywide PLC (LON:CWD) crashed by almost two-thirds following news of the much-anticipated fund-raising.

Shares in Countrywide closed at 49.95p last night; this morning you could have them for around 18.5p after the company said it had firm undertakings from financial institutions to take a staggering 1.11bn shares at 10p a pop.

READ: Countrywide says “continuing to engage in constructive dialogue with its lending banks and its shareholders”

On top of that, the group, which relisted on the London Stock Exchange in 2013 after being bought by private equity group Apollo Management, plans to issue a further 285.6mln shares at 10p each by way of a placing and an open offer.

The firm placing will raise around £111.4mln while the proposed placing and open offer should see another £28.6mln or so make its way into the company’s depleted coffers.

The proceeds from the heavily discounted (to put it mildly) share issue will keep the company afloat while it executes its turnaround plan. Countrywide said the funds would reduce its net debt by around 60%.

When the company refloated in 2013, it had net debt of around £22mln; by the end of June this year it had risen to £212mln, and that was after the company had raised £37.82mln through a share placing in March 2017, when institutions were happy to pay 175p a share.

"The capital refinancing announced today is a significant milestone for the group,” said Peter Long, the executive chairman of Countrywide.

“It will enable us to build upon the progress we have made to date on our three-year recovery plan as we deliver our return to growth strategy. Although it is still very early in the turnaround, we are encouraged by the operational improvements that we are making and the tangible results that are being achieved,” Long said.

Emergency fundraising

The emergency fund-raising was announced alongside the company’s half-year results, which showed that group income declined by 9% to £303.6mln in the first half of 2018 from £332.7mln in the corresponding period of 2017.

As previously flagged to the market, this was principally driven by a sluggish house sales market.

Adjusted underlying earnings (EBITDA) were down, at £10.7mln, from £27.8mln the year before but were slightly better than the guidance figure the company had been giving the market.

Impairment charges of £210.7mln to cover the decline in value of goodwill, brand names and customer contracts in respect of the UK and London cash-generating units plus assorted other intangible and tangible assets contributed to a loss before tax of £242.7mln, compared to a profit of £192,000 in the first half of 2017.

The group said it has made significant progress in building back industry expertise and staffing levels in its Sales and Lettings and Financial Services businesses.

The register of properties at the end of June was up 3% year-on-year and the pipeline had improved by £12.7 million since the end of 2017, compared with an £11.5mln improvement in the same period last year.

The group has also completed the reduction of central functions headcount by a third, which has funded the build-back of staff in Sales and Lettings.

Personnel

Countrywide announced the appointment of Paul Creffield as the group’s managing director, while Paul Chapman becomes the chief operating officer.

Russ Mould, the investment director of AJ Bell, said the humbling of Countrywide serves as a salutary lesson for investors.

“Investors should be very wary when a business is both operationally and financially geared as today’s news from estate agent group Countrywide demonstrates,” Mould advised.

“As a traditional operator, rather than a disruptive web-based rival like Purplebricks, Countrywide has lots of fixed costs relating to estate agency branches and staff which cannot immediately be taken out in response to weakening demand. In other words, it has high operational gearing,” Mould explained.

“And, unlike its London-focused rival Foxtons, it also has lots of debt making it financially geared too. This creates a double whammy for the business as a softer property market has put a lot of pressure on the bottom line and made it increasingly difficult for it to service its borrowings.”   

Quick facts: Countrywide

Price: 392 GBX

LSE:CWD
Market: LSE
Market Cap: £128.68 m
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