Purplebricks Group Plc Proposed Placing for US Expansion

Purplebricks Group Plc

Purplebricks Group plc (LON: PURP) has this afternoon announced its intention to raise up to £50 million (before expenses) for US expansion through an issue of new ordinary shares of 1 pence each in the capital of the Company (the Placing Shares), with certain existing and new institutional investors (the Placing). The Placing is being conducted through an accelerated bookbuilding process (the Bookbuild) which will be launched with immediate effect following this announcement.

Highlights of the Placing

· Purplebricks intends to raise up to £50 million pursuant to the Placing at a price of 220 pence per Placing Share (the Placing Price).

· The Placing is being conducted, subject to the satisfaction of certain conditions, on the Company’s behalf by the joint bookrunners, Zeus Capital Limited (Zeus Capital), Peel Hunt LLP (Peel Hunt) and Investec Bank plc (Investec) (together, the Joint Bookrunners). The Placing is not underwritten by any of the Joint Bookrunners.

· The Placing Price represents a discount of approximately 0.6 per cent to the closing mid-market price of an Existing Ordinary Share on 21 February 2017, the latest practicable date prior to the publication of this announcement. The number of Placing Shares and the allocations will be determined by the Joint Bookrunners in consultation with the Company at the close of the Bookbuild.

· The Bookbuild will commence immediately and is expected to close no later than 7.00 pm today, although the timing of the closing of the Bookbuild, the number of Placing Shares to be issued pursuant to the Placing and the allocations are at the discretion of the Joint Bookrunners (in consultation with the Company). Details of the number of Placing Shares to be subscribed for in the Placing will be announced as soon as practicable after the close of the Bookbuild.

· The Placing is conditional on, amongst other things, (i) the passing by the requisite majority of Shareholders of resolutions to grant authorities to Directors to allot further shares for cash on a non-pre-emptive basis; and (ii) admission of the Placing Shares to trading on AIM on or before 8.00am on 14 March 2017 (Admission).

· The net proceeds of the Placing (expected to be up to £48.7 million) will be utilised by the Company to enable Purplebricks to launch its business in the US, initially by establishing itself in a number of key states. The Directors intend that the first stage of the roll out of the Purplebricks proposition in the US will begin in the second half of 2017. The Directors consider that there is a significant opportunity for the Company to make a meaningful impact on the US real estate market, which is estimated by the Company’s management to be worth approximately US$70 billion annually in total real estate commission income.

Michael Bruce, Group Chief Executive Officer of Purplebricks Group plc, said: “We are proud to announce our plans to launch Purplebricks in the US, a market we estimate to be worth some US$70 billion in annual estate agent commission. Our customer proposition of high quality service and value, delivered through the combination of technology and people, is driving irreversible change in the UK and Australian markets. We are confident that with our understanding of the US market and our experience from having already launched in two markets Purplebricks can build a significant business in what could be one of the most fascinating and rewarding real estate markets in the world.

For the realtors we recruit Purplebricks presents an exciting new platform to build scalable, profitable businesses in their own dedicated regions, supported by our strong technology infrastructure and marketing reach. For US customers we are seeking to offer a better deal in selling and buying their homes, with a more convenient, transparent and cost effective service.

As with our UK and Australian launches we will adopt a state-by-state roll out strategy. The funds raised through the Placing will not only be deployed to build the Purplebricks brand in the US but, also, the people and infrastructure needed to manage rapid growth in that market.

With trading in the UK and Australia in-line with the board’s expectations and with the development of the US opportunity, we are proud of the team’s achievements to date and excited for our global future.”

Reasons for the Placing

The net proceeds of the Placing (approximately £48.7 million) will be used for additional expansion capital to enable the Company to establish itself in a number of key states across the US. The Directors consider there to be a significant opportunity to make a meaningful impact on the US real estate market. In particular, the Directors intend to utilise the net proceeds of the Placing to:

(a) finalise the Company’s infrastructure in preparation of the launch into the US;

(b) finalise the recruitment of the management team for the US business;

(c) build the Purplebricks brand and raise consumer awareness of the Purplebricks proposition in targeted states across the US through the US advertising and marketing strategy;

(d) commence the recruitment and training of LPEs in the US; and

(e) continue the development of the Purplebricks platform.

Details of the Company’s planned strategic expansion, as well as information on the US market, further details of the Placing and an operational update on the Company, are set out below.

Defined terms used in this announcement have the meanings given in Appendix III, together with the terms and conditions of the Placing which are set out in Appendix II. Appendix I contains certain risk factors relating to the Company’s business, its proposed expansion and an investment in Placing Shares pursuant to Placing.

Background to the United States real estate market

The Directors consider expansion of the Company’s business and the Purplebricks brand into the US real estate market to be the next logical step in the Company’s expansion. The US, which has a gross domestic product (GDP) of approximately US$18 trillion and a population of approximately 324.5 million, is one of the world’s largest real estate markets. The GDP of six of its constituent states alone would, if each were treated as an independent economy in its own right, rank within the top 20 globally.

Notwithstanding this, the US real estate market remains highly fragmented. The top five states by residential sales volume units as an example (California, Texas, Florida, Illinois and Ohio) represent, on average, approximately 25 per cent of the total residential real estate transaction volume (5,450,000 in 2016 – over five times as many as in the UK). This fragmentation is demonstrated by the fact the market is comprised largely of individual realtors – with the US Association of Real Estate License Law Officials recording more than 2 million licensed estate agents. The Company’s management estimates that total real estate commission income in the US is in the range of c. US$70 billion annually (compared with US$4.3 billion in the United Kingdom).

The Company believes that the Purplebricks platform and business model is scalable and can be adapted to the US market. Given the many comparable trends, sentiment and similarities between the property markets in the US, the UK and Australia, the Company’s expansion strategy will be shaped significantly by the Company’s experiences with its successful UK and more recent Australian operations. Although the Company initially intends to strategically roll out across a defined number of US states, the US as a whole represents a significant opportunity for future growth in the longer term.

Despite the many similarities, the US market does have some process aspects which are different from the markets in which the Company currently operates. In the US, the sale of residential property is typically conducted through a Listing Agent (sell side) and a Buying Agent (buy side). The Listing Agent will agree with the seller a commission (typically up to 7 per cent of the sale price) and list the property on a Multiple Listing Service (MLS). The primary purpose of an MLS is to provide a facility for Listing Agents to publish all of their listings, enabling Buying Agents to introduce potential buyers for the property. The Listing Agent may also act as the Buying Agent by introducing buyers to its own listings.

In listing a property on an MLS, the structure of the US market is such that the Listing Agent will offer potential third party Buying Agents a share of the Listing Agent’s negotiated commission (typically 2 – 3 per cent of the property’s sale price). However, should the Listing Agent also introduce the buyer to the property that it has listed, then the Listing Agent effectively acts as a Dual Agent (i.e. Listing Agent and Buying Agent) and retains the entire commission negotiated with the seller. Accordingly, the nature of the US system is such that every real estate agent is entitled to advertise the properties of the other real estate agents (who are part of an MLS) on their own website and act as Buying Agent by making introductions.

The structure of the US residential property market, therefore, presents a significant revenue opportunity for the Company, as estate agents in the US can earn revenue from selling a property as Listing Agent and additional revenue from introducing buyers to properties for which they act as Listing Agent (thereby retaining the entire commission by acting for both sell-side and buy-side) or by acting as Buying Agent and selling other Listing Agents’ properties which are on an MLS.

Details of the Company’s proposed strategic expansion into the United States

The Directors consider that there is now a significant opportunity to make a meaningful and lasting impact on the US real estate market. It is intended that, initially, the Company will strategically roll out in a defined number of US states, launching in the second half of 2017, before rolling out more widely across other states. The initial expansion into the US is to be funded from the net proceeds of the Placing and will be led by US Chief Executive Officer, Eric Eckardt, supported by Founder and Group CEO Michael Bruce and his brother and co-founder Kenny Bruce. Eric has more than 20 years of experience in real estate, finance and technology.

The Company will look to attract some of the most experienced real estate agents in the US property industry who want to run their own businesses, as many of Purplebricks’ existing LPEs do. The Directors believe that real estate agents in the US will want to become LPEs, given the compelling customer proposition and the benefits of the Purplebricks model. The Purplebricks model should allow agents to spend more time focusing on looking after customers and selling homes, rather than a significant proportion of their time being taken up prospecting for the next listing. This is possible because a sustained marketing and advertising campaign is intended to drive listing appointments to the LPEs (see below). The Purplebricks platform and business model is designed to result in improved LPE productivity which provides LPEs the opportunity to earn more revenue than they would as a traditional real estate agent.

As with the Company’s other markets, LPEs will undergo a rigorous recruitment and training program. It is intended that LPEs will be granted territory on a zip-code by zip-code basis, providing them with an exclusive region within which to operate on behalf of Purplebricks. They can then build and grow their territory by engaging other agents (subject to Purplebricks’ recruitment and training) to act as LPEs within their territory and earn income from each of them and create future capital value for their own businesses.

The Company’s technology should help to ensure that Purplebricks delivers a high quality service to customers. The Purplebricks platform will, once rolled out, provide US customers, LPEs, Listing Agents and Buying Agents with a reliable means of engaging in the process of buying and selling real estate at all times of the day and night. Through a dedicated dashboard and platform, buyers and sellers would be able to appoint Purplebricks, book a listing appointment and arrange showings (viewings), approve property listing particulars and advertisements, receive feedback after showings, access information and advice, receive and negotiate offers and agree a sale. The platform is designed to be accessible 24 hours a day, seven days a week and often with the click of a button. Buyers, sellers, LPEs, Listing Agents and Buying Agents will be able to safely and securely communicate with one another through the Purplebricks platform or, if they wish, communicate with Purplebricks. The Purplebricks model is intended to make LPEs, Listing Agents and Buying Agents more productive and for the customer’s journey to be more convenient, transparent and cost effective.

The net proceeds of the Placing will be used to adapt Purplebricks’ platform and technology to meet the specific characteristics of the US market meet the needs and requirements of consumers and to address the buy side and sell side commission system that operates there. In particular, it is intended that the Purplebricks platform will have a fully integrated data feed from the MLS that will provide Purplebricks.com with an active market inventory. This will enable homebuyers to search all market properties, acting as a funnel to capture buy-side opportunities for the Company. Through a cooperation agreement via an MLS, the Directors believe the Company could be paid a 2 – 3 per cent buy-side commission for introducing successful buyers to other Listing Agent’s properties.

Further, Purplebricks Group Plc has one of the largest databases of homemovers in the UK. The Directors intend to build the same in the US and make use of the Company’s customer facing technology to create more revenue opportunities for the business.

The recruitment and training of local LPEs and the adaptation of the Purplebricks platform and business model for the US will be coupled with an advertising and marketing strategy built upon the Company’s successful brand lead strategies in the UK and Australia. The Directors consider advertising and marketing to have played a significant part in the growth of the Company’s existing business, with Purplebricks having become the most recognised real estate agency brand in the UK property market in less than three years.

It is intended that there will be a detailed marketing strategy to secure:

(a) listings for Purplebricks;

(b) buy side activity for Purplebricks properties; and

(c) buy side activity for other Listing Agents’ listings.

A number of key advertising mediums are expected to play a key part in building a trusted brand that is capable of resonating locally. The Company’s media mix will be variable across markets. More tactical media could be used to supplement broadcast acquisition and can be quickly scaled up or down as required to generate listing opportunities. An “always on” approach to broadcast media will be used to generate demand which should encourage organic momentum. The Directors believe that there will also be further opportunities to invest in lead generation through subscribing to leading listing portals.

The Directors believe that Purplebricks’ advertising and marketing strategy will attract sellers and buyers. Once attracted to Purplebricks.com, they will be able to undertake a search of most of the market (Purplebricks listings and those of other Listing Agents). It is expected that those sellers and buyers will use the Purplebricks website to arrange viewing or listing appointments, whether or not those listings are Purplebricks.com listings or those of another Listing Agent.

The development of the customer journey will be constantly monitored with a view to ensuring an increase in conversion rates and a reduction in the overall cost per acquisition.

Details of the Placing

The Bookbuild will open with immediate effect following this announcement. The Company has entered into the Placing Agreement with each of the Joint Bookrunners on customary terms and conditions pursuant to which, subject to the conditions set out in the Placing Agreement, each of the Joint Bookrunners agreed to use its reasonable endeavours (as agents for the Company) to procure Placees for the Placing Shares at the Placing Price.

The number of Placing Shares will be determined by the Joint Bookrunners in consultation with the Company at the close of the Bookbuild. The timing of the closing of the Bookbuild, pricing and allocations are at the discretion of the Joint Bookrunners in consultation with the Company. Details of the number of Placing Shares will be announced as soon as practicable after the closing of the Bookbuild.

The obligations of each of the Joint Bookrunners under the Placing Agreement in respect of the Placing Shares are conditional upon, inter alia, the Resolutions being duly passed at the General Meeting and Admission becoming effective on or before 8.00 a.m. on 14 March 2017 (or such later time and date as the Company and each of the Joint Bookrunners shall agree, not being later than 8.00 a.m. on 24 March 2017).

The Placing Agreement contains provisions entitling the Joint Bookrunners to terminate the Placing Agreement at any time prior to Admission in certain circumstances. If this right is exercised or if the conditionality in the Placing Agreement is not satisfied, the Placing will not proceed.

The Company has agreed to pay the Joint Bookrunners certain placing commissions together with reimbursement of certain costs and expenses incurred in connection with the Placing.

Application will be made for the Placing Shares to be admitted to trading on AIM. Subject to the Resolutions being passed at the General Meeting, it is expected that Admission of the Placing Shares will become effective and that dealings will commence in the Placing Shares at 8.00 a.m. on 14 March 2017.

The Placing Shares, when issued and fully paid, will rank pari passu in all respects with the Existing Ordinary Shares and will rank for all dividends or other distributions declared, made or paid after the date of issue of the Placing Shares.

General Meeting and circular to Shareholders

It is not expected that the Company’s existing share issuance authorities will be sufficient for the issue of the Placing Shares pursuant to the Placing and therefore the General Meeting will be held to seek Shareholder approval to grant authorities to the Directors to allot further shares for cash on a non-pre-emptive basis (i.e. the Resolutions). A circular, together with a notice convening the General Meeting, will be sent to Shareholders tomorrow, 23 February 2017. It is expected that the General Meeting will be held on 13 March 2017 and that the Placing Shares will be issued shortly thereafter, subject to Admission.

The Directors consider the Placing to be in the best interests of the Company and Shareholders as a whole and accordingly unanimously recommend Shareholders vote in favour of the Resolutions to be proposed at the General Meeting as they intend to do in respect of their own beneficial holdings and the shareholdings in which they are interested amounting, in aggregate, to 61,952,098 ordinary shares, representing approximately 25 per cent of the ordinary shares as at the date of this document. The Company’s largest shareholder, Woodford, has also indicated to the Company its intention, subject to the outcome of the Bookbuild, to provide an irrevocable undertaking to vote in favour of the Resolutions.

Current trading and operational update

With a few key months remaining ahead of us, the Board is pleased with the progress the Company is making and confirms that it is trading in line with the Board’s expectations for the financial year ending 30 April 2017.

United Kingdom – building upon our achievements

In less than three years, Purplebricks has become the most recognised brand in the UK property market having become known for being a fair, modern and transparent way to sell a property. To date, over £6 billion in residential property has been sold via the Purplebricks platform in the UK alone. These achievements have given the Company, according to data from Rightmove, a 67% share of new instructions for the online real estate market in the UK. The Purplebricks website now receives over 1.45 million visits per month.

Australia – shaking up an industry

The Company launched its business into the Australian market in September 2016 and now services Queensland, Victoria and New South Wales. The Purplebricks platform is expected to be launched in Adelaide and Perth in March and April 2017, respectively. Growth in the Company’s Australian operations has occurred faster than any UK regional launch, and the number of LPEs has quickly grown to over 50.

Despite being Australia’s seasonal month for holidays, January 2017 was a record month for new property instructions for the Company. With average revenue per listing exceeding A$5,000, the Company estimates that Australian customers save an average of over A$12,000 in estate agents’ fees when compared with a traditional commission structure (saving homeowners millions of dollars since Purplebricks entered the market five months ago). The Company has a strong management team in Australia and Purplebricks has achieved a 9.5 out of 10 (“excellent”) rating with 98% positive reviews on Trustpilot.

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