A deal like Realogy Holding Corp.’s planned $166 million acquisition of brokerage and real estate tech provider ZipRealty doesn’t just happen overnight.
In a pitch to shareholders, ZipRealty reveals that starting in March, it shopped itself around to 43 companies, including “25 major companies in the real estate brokerage, services and technology” business, and “18 financial sponsors with a focus on technology, real estate and business services.”
The search for suitors came after Realogy turned down an offer to take a 20 percent stake in ZipRealty last fall. Starting in January, ZipRealty explored not only a sale of the whole company, but a sale of the brokerage business and software business to two distinct buyers, or a brokerage-only sale and a software-only sale.
Realogy says the acquisition, expected to close by the end of September, was attractive not only because of ZipRealty’s “established, highly productive, technology-based national residential brokerage operation,” but because it plans to “capitalize on the innovative technology platform that ZipRealty has honed over more than a decade of development.”
ZipRealty’s 1,800 sales associates handled $2.7 billion in sales volume in 23 markets last year. Realogy will integrate 17 of ZipRealty’s brokerage offices into existing Coldwell Banker offices operated by Realogy’s brokerage subsidiary, NRT. The remaining six ZipRealty offices — Seattle, Portland (Oregon), Las Vegas, Houston, Austin, and Richmond (Virginia) — will continue to operate on a stand-alone basis under the ZipRealty brand.
Realogy will make ZipRealty’s Powered by Zip technology platform, which generates and manages leads, available to all Realogy franchisees. Realogy’s franchise brands include Better Homes and Gardens Real Estate, Century 21, Coldwell Banker, ERA and Sotheby’s International Realty.
Although ZipRealty’s “Powered by Zip” referral network will continue to operate in 21 markets — more than half of participating brokerages are owned by NRT or affiliated with Realogy brands — it’s unclear if the Powered by Zip platform will still be offered as a “white label” product to other brokerages.
Realogy has said it valued ZipRealty’s brokerage business at $100 million to $120 million, its technology platform at $25 million to $45 million, and tax write-offs tied to past ZipRealty net operating losses at $21 million.
ZipRealty CEO Lanny Baker will stay on in that role, reporting to Alex Perriello, president and chief executive officer of the Realogy Franchise Group.
Excerpts from a ZipRealty filing with securities regulators tell the story of how the deal got done:
Looking for a “strategic partner”
In 2013, ZipRealty executives “met on several occasions with representatives of Realogy regarding a potential strategic relationship.”
On Aug. 19, 2013, Ryan Gorman, senior vice president of strategic operations of Realogy’s brokerage subsidiary, NRT, introduced ZipRealty CEO Charles “Lanny” Baker to Realogy CEO Richard Smith. “Mr. Baker, Mr. Gorman and Mr. Smith discussed the potential for a strategic relationship between Realogy and the company. However, after careful consideration, Realogy chose to not pursue a large-scale strategic relationship at that time.”
On Sept. 12, 2013, “Mr. Baker contacted Mr. Gorman to discuss whether Realogy would be interested in purchasing a block of shares representing approximately 20 percent of the company’s outstanding shares from an unidentified stockholder, but noted that Realogy would be required to make a determination regarding such acquisition quickly enough so that a closing could occur within several days. Realogy evaluated the opportunity in the short time frame provided, but ultimately decided against the potential acquisition of shares while indicating that it would be interested in similar opportunities in the future if given more time to consider the acquisition.”
January 2014: laying the groundwork for an acquisition
“During January 2014, members of the company board discussed with members of senior management the possibility of whether it was an appropriate time to seek to determine what a third party may be willing to pay to acquire the company and that this type of process would likely involve not only discussions with a financial adviser, but also contacting third parties to gauge their interest in any such potential acquisition.
“The company’s decision to explore strategic alternatives, including a potential acquisition, was based on the risks of operating its more cyclical brokerage business while simultaneously pursuing the growth opportunity held within its emerging technology licensing business unit. The relatively more established brokerage business faced a more difficult external operating environment around this time, while the perceived growth potential and investment needs of its technology business were increasing at the same time. Senior management and the company board believed that in light of these risks and the possibility that a third-party acquirer could provide significant additional value to the company’s stockholders, it would be in the best interests of the stockholders and the company for the company board to further consider and evaluate a possible sale of the company.”
February: hiring an investment bank
The company’s senior management “contacted seven investment banks and began to review proposals from several of those investment banks to serve as a strategic financial adviser to the company … The company discussed with investment banks their strategies for identifying competing bidders in a merger and acquisition process, proposed approaches for assisting the company in evaluating strategic alternatives, and fee structures.”
Feb. 27: GCA Savvian Advisors LLC makes its pitch
On Feb. 27, “the company board held a meeting … at which they further discussed the engagement of an investment bank.” At the meeting, ZipRealty CEO Baker “reported that the company’s senior management had interviewed three investment banks and had narrowed the group to one candidate, GCA Savvian Advisors LLC (“GCA Savvian”), which made a presentation to the company board at the meeting. GCA Savvian provided its recommendations for conducting a sale process and potential transaction structures, including a sale of the whole company, a sale of the brokerage business and software business to two distinct buyers, a brokerage-only sale and a software-only sale.”
March 7, 2014: GCA Savvian hired as exclusive financial adviser
ZipRealty hired GCA Savvian on March 7 to explore the sale of the company, and between March 17 and April 11, the investment bank “contacted a total of 43 entities, including Realogy and Parties A, B and C to solicit their interest in a potential strategic transaction involving the company. This total includes 25 major companies in the real estate brokerage, services and technology markets, and 18 financial sponsors with a focus on technology, real estate and business services. The company entered into, or had previously entered into, separate confidentiality agreements with 19 potential acquirers, and provided confidential and nonconfidential information to those interested parties in furtherance of their respective due diligence investigations of the company.”
March 27: Realogy proposes acquisition
On March 27, “Mr. Baker visited Realogy’s offices in Madison, New Jersey, and informed representatives from Realogy that the company had been developing its Powered by Zip software for third-party use. Mr. Smith then informed Mr. Baker that Realogy was interested in exploring a potential acquisition of the company.”
On March 31, ZipRealty’s board of directors was briefed on the process so far. “Baker reported that to date GCA Savvian had contacted 41 parties, including both financial and strategic parties. Of that number, 14 were in the process of executing confidentiality agreements with the company, 15 were reviewing initial materials and 12 had declined to engage further. Mr. Baker updated the company board on his meeting with Realogy and that he planned to continue discussion with Realogy with the involvement of GCA Savvian.”
“Mr. Baker informed representatives from Realogy that the company board was open to exploring a potential acquisition and had retained GCA Savvian as its financial adviser.”
“Between April 9, 2014 and April 16, 2014, senior management met with six additional interested parties, including Party A. Party A discussed with senior management a range of options for a strategic alliance, including partial business combinations, modifications in the company’s business model and approach, and a strategic investment in the company.”
On April 18, representatives of GCA Savvian presented “an extensive presentation on the process to date” to ZipRealty’s board of directors.
“As of that date, 43 parties had been contacted; of those, 17 had expressed interest in moving forward, 21 had declined to engage further and five were still evaluating the opportunity. GCA Savvian updated the company board on the six senior management meetings with interested parties other than Realogy that had taken place (including Party A) between April 9, 2014 and April 16, 2014.”
“Between April 21, 2014 and May 1, 2014, senior management and GCA Savvian met with an additional eight interested parties, including with Party C.”
“Between April 23, 2014 and May 20, 2014, the company provided similar product demonstrations to four other interested parties.”