The merger of Washington, D.C.-based Cassidy Turley with DTZ announced this week pairs a mid-market company with 60 offices around the U.S. with a recapitalized international player that has long sought a bigger piece of the U.S. property market -- and now has the financial backers to bankroll its global expansion.
The new DTZ Group, created by the acquisition of Cassidy Turley by a consortium of private equity company TPG Capital, PAG Asia Capital and Ontario Teachers’ Pension Plan,
would approach Cushman & Wakefield in terms of annual revenue.
The Cassidy Turley acquisition should enable DTZ to make an instant impact in the all-important U.S. market. While DTZ has a strong franchise in Europe and Asia, "They’ve been mostly an afterthought in the U.S.," said Brandon Dobell, an analyst with William Blair & Co. who tracks the CRE services industry. The challenge for the new company during the integration will be keeping top CT talent, especially tenant representation experts, from jumping ship, he added.
It's likely that DTZ will pursue an IPO down the road as part of its bid to become a true rival to CBRE, JLL, Colliers International (a unit of Toronto-based FirstService Corp.) and HFF Inc. Such a move is expected, Dobell said, given the solid performance of the CRE services sector and the new company’s need to raise cash to recruit talent and lock up key producers. Revenue/Employee Count for Major CRE Firms Company 2013 Revenue Employees
CBRE $7.18 billion 44,000* JLL $4.46 billion 52,700 DTZ Group $2.9 billion (est.) 28,200
Cushman & Wakefield (Exor S.p.A)$2.5 billion16,000Colliers International (FirstService Corp.)$2.1 billion15,800
*Excluding 4,325 affiliate employees
"You have a private equity backer that at some point will need some liquidity -- TPG is not in the business of holding things for a decade or two," Dobell told CoStar News. "Obviously, Brett White is a tremendous asset for TPG, as well as for the operating company. He’s seen everything, been through a ton of market cycles and M&A during his time at CBRE, so he’s an invaluable resource."
Although the value of the transaction was not disclosed, the Wall Street Journal reported the deal at between $500 million and $600 million, including less than $75 million in debt, citing sources familiar with the transaction.
The Cassidy Turley transaction hinges on the expected closing of the TPG consortium’s $1.15 billion acquisition of DTZ from Australia-based UGL Limited, whose chairman, Richard Leupen, on Tuesday called the CT deal "a positive development for both companies."
"We believe the potential combination of these two companies will reinforce DTZ’s positon as a leading global property services company and enhance the future opportunities for both companies and their people," Leupen said. UGL also confirmed today that TPG has advised of its intention to complete the purchase of DTZ in early November.
Dobell said the Cassidy Turley transaction is emblematic of the consolidation wave that has swept away numerous mid-sized CRE firms, leaving a few large companies and niche players. Most recently, London-based Savills PLC paid $260 million in cash and stock for New York-based Studley Inc.
Since the 1980s, the CRE services space has resembled the investment banking industry, evolving from a couple of large firms and scores of much smaller players to a handful of large companies and niche firms competing against a pool of middle sized firms that have either lost their business identity or can’t match the global scale and reach of their larger rivals.
"The middle is going to be challenging. Just look how many firms have gone away the last four years," Dobell said. "This transaction brings together two firms that were at risk if they couldn’t get bigger -- and it probably staves off customer and broker concerns about the longevity of those businesses."
In today’s environment, service providers like JLL and CBRE that cross-sell financial services or serve multinational companies with a global list of services like property and facilities management a grabbing a disproportionate share of sales and leasing activity, Dobell explained.
"The competitive pressures for having a full suite of services globally are really relevant, and are certainly fueled by access to cheap debt," Dobell said, noting that CBRE, now a $10 billion company, was at $200 million market cap as recently as 2008.
Recurring revenue streams such as property and facilities management are much larger, constituting 40% of total revenue for JLL and CBRE compared to 15% or 20% in 2007, creating a hedge against property market peaks and valleys.
"As the CRE industry becomes more diverse, the business is becoming less cyclical, and those kinds of companies tend to be pretty good places for private equity money, as well as places where brokers will stay put through a market cycle," Dobell said.