Apollo Management Is Poised
To Buy Real-Estate Firm Realogy

In a further sign of private equity's widening influence over the economy, buyout firm Apollo Management agreed to purchase real-estate services firm Realogy Corp. for $6.6 billion, company officials said yesterday.

As the holding company for such operations as Coldwell Banker, Century 21 and the Corcoran Group, the former Cendant Corp. arm is one of the most powerful players in the U.S. residential real-estate market, with a hand in one of four brokered U.S. home sales.

That position has put Realogy in a tight bind given the faltering domestic real-estate market. The company is forecasting sharp revenue declines for the foreseeable future, a bleak outlook that has weighed on its shares since they were first offered to the public in July.

Nonetheless, Apollo is taking on a large wager -- some $2 billion of its own capital -- that real-estate sales will recover shortly and that Realogy will maintain its strong brand names. Apollo has the benefit of hyperliquid financing markets, which are backing the rest of the purchase while allowing it to assume an additional $2.4 billion or so in existing Realogy debt and other liabilities.

As in most private-equity deals, Apollo is essentially asking shareholders to trade some of Realogy's long-term potential for a short-term profit, in this case a $30-per-share offer that awards an 18% premium to Friday's closing price of $25.50. Following a spinoff from the old Cendant conglomerate, the company's shares began trading at just under $26, and later dropped below $20 in September.

"The view of the board is that companies with declining earnings and no visible growth should be private," said Realogy Chairman and Chief Executive Henry R. Silverman. Buyout shops "have a much longer-term view. The people who own our stock have a five-second view. These are the kind of people whose performance is graded weekly, monthly, and annually. They don't have that kind of patience."

It still remains to be seen just how satisfied these shareholders will be with the transaction. Realogy didn't hold a broad auction for the company, an approach that shareholders usually favor. The company does have a "go shop" in place that allows it to find a buyer at a higher price, but go-shops have proved largely futile exercises since coming into vogue over the past year.

Shareholders are also likely to examine the relationship between Apollo and Realogy's management. The two sides don't have employment agreements in place, but Apollo anticipates that the executives will remain with the company once it is taken private. The sides have a deep history together, forming a business called National Realty Trust nearly 10 years ago to consolidate operations serving the residential real-estate market, with Cendant buying out Apollo's stake in 2002. Neither Mr. Silverman nor other top managers participated in the sales negotiations, Mr. Silverman said.

Shareholders can take satisfaction in the tax treatment that Realogy will be enjoying in the sale. The company was originally part of the Cendant conglomerate, a huge services and franchisor formed by the 1998 merger of HFS Inc., and CUC International Inc. An accounting scandal dogged Cendant from the get-go, as its various real-estate and travel-related businesses struggled to mesh.

Mr. Silverman later retreated on his strategy, and Cendant chose to break up the company, using a tax-free spinoff over the summer. By comparison, an outright sale of the company from a corporate parent would have resulted in a large tax bill. And now that Realogy is a stand-alone entity, it doesn't have to pay taxes on its own sale.

The question for Apollo is whether Realogy's market position will remain as strong in the years ahead. The National Association of Realtors projects that sales of previously owned homes in the U.S. this year will total 6.47 million, down 8.6% from a year earlier. The trade group expects a further 1% decline in 2007 but says sales should be starting to rebound by the end of the year. Some economists, however, believe the housing market could remain sluggish for several years.

The slowdown has slashed earnings for real-estate brokers. In the third quarter, after stripping out costs related to restructuring and the spinoff from Cendant, Realogy's earnings before interest, taxes, depreciation, amortization and minority interests came to $277 million, down 32% from $406 million a year earlier.

One long-term threat is that discount brokers eventually will grab a bigger share of the market, pushing down commission income, but Realogy officials have insisted that most consumers are willing to pay for services offered by traditional brokers.

Evercore Partners and attorneys Skadden, Arps, Slate, Meagher & Flom advised Realogy. J.P. Morgan Chase & Co. and Credit Suisse with attorneys from Wachtell, Lipton, Rosen & Katz advised Apollo. J.P. Morgan Chase, Credit Suisse and Bear Stearns are financing Apollo's debt.

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