BREAKINGVIEWS-Real-estate broker pays dearly for M&A bricks

By Sebastian Pellejero

NEW YORK, Sept 22 (Reuters Breakingviews) - Upgrading from straw to brick is expensive and dangerous. Compass COMP.N, the biggest U.S. real estate brokerage by sales, will be paying dearly to do so just as stiffer winds blow against the industry. It agreed to buy rival Anywhere Real Estate HOUS.N for $1.6 billion in stock, a risky attempt to prop up a model facing weak demand and fee compression.

At $13.01 per share, Compass agreed to shell out an 84% premium for control of its largest competitor. Anywhere's backers would receive roughly 1.4 Compass shares for each Anywhere share, giving them roughly 22% of a combined company worth some $10 billion, including debt. Compass swiftly lost 16% of its market value, reflecting some understandable investor concerns.

The $225 million of expected annual cost savings are worth about $1.7 billion, once capitalized and taxed at 25%. That more than covers the $800 million premium being paid, but isn't enough to justify the deal financially. Add them to Anywhere's projected operating profit, per Visible Alpha, and the implied investment return amounts to about 6%, Breakingviews calculates. In real estate services, broadly speaking, the weighted average cost of capital is more than 8%, according to New York University professor Aswath Damodaran.

Elevated mortgage rates and weak home sales have already squeezed margins. Those of both Compass and Anywhere's brokerage business are forecast to be -1% for 2025. And while the Federal Reserve may further lower short-term benchmark borrowing costs after cutting them last week, persistently higher long-term yields will probably limit any relief for housing demand.

Profit fragility, meanwhile, is colliding with structural change. A court settlement last year scrapped rules that locked in buyer-agent commissions. Buyer fees have held at 2.4% of sales since the rule changes, according to Redfin data. With the regulatory shield gone, however, sellers are increasingly asking why they should cover both sides while buyers are motivated to negotiate fees upfront.

Meanwhile, online portals such as Zillow ZG.O and CoStar's CSGP.O Homes.com dominate homebuyer attention, funneling leads and testing exclusive listings that threaten the traditional splits. Builders like Lennar LEN.N are also selling houses directly, cutting agents out entirely. The market has noticed: Compass and Anywhere shares have tumbled 50% over the past five years, while Zillow's slid 38%, CoStar's are flat, and a fund tracking U.S. homebuilders is up 58%.

From that perspective, this attempt to consolidate the two top brokers looks largely defensive. Technology and cost-cutting may buy them some time, but it's a costly attempt to shore up an eroding foundation.

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CONTEXT NEWS

U.S. residential real estate brokerage Compass said it agreed to buy rival Anywhere Real Estate for $1.6 billion in stock, a deal that would combine the industry's top two operators into a company with an enterprise value of about $10 billion.

Morgan Stanley is advising Compass on the transaction while Goldman Sachs is advising Anywhere.