£1 purchase could be very big deal indeed

AS the UK crawls out of the worst property downturn for decades, an estate agency group might seem an unlikely winner.

Back in late 2008, as shares in York-based estate agency firm LSL Property Services dropped to 30p and its market cap wallowed at about 32m, some investors saw a chance to profit from its imminent demise.

Expecting the group's 65m net debt to sink it, they shorted the company, hoping to make money from a further fall in its share price.

At the time, few would have argued with their logic. With the banking system in turmoil and consumer confidence dropping like a stone, LSL's estate agency and surveying arm faced a housing market on the edge of precipice.

But LSL chief executive Simon Embley thought otherwise. Believing the market had called it wrong, he promptly spent almost 400,000 on 1.26 million LSL shares.

Today, as the group threatens to break into the FTSE 250 and its share price hovers around 260p, Mr Embley has been vindicated.

But he is not resting on his laurels. LSL has just completed the acquisition of 218 Halifax estate agencies from Lloyds Banking Group for a token 1, which won Deal of the Year at the recent Quoted Company Awards.

Now Mr Embley has the task of integrating them into the group's Your Move, Reeds Rains and InterCounty portfolio and making them profitable.

On the face of it, the acquisition looked a steal, beating intense competition. It shot LSL up to the UK's second-largest estate agency group behind Countrywide, creating a network of 584 branches. The estate agencies came with 22.2m cash and net assets worth about 38.4m.

But scratching beneath the surface also revealed deep-rooted problems – the Halifax branches made 51m losses in 2008.

"It was in a very poor financial state as a business and required huge amounts of restructuring work," said Mr Embley. "This was not a slam dunk by any means.

"The question we had was 'How bad a shape is this business in, and if we get it wrong, how badly could it damage our earnings?'"

Extra income generated by Halifax branches from lettings, conveyancing and insurance was paltry. Some branches failed to make any outgoing sales calls.

An expensive network of regional managers also leant heavily on branch managers, restricting their decision-making.

In 2008, recharge costs for marketing, IT and infrastructure and leases hit almost 40m.

At the heart of its problems was the "Halifax culture", the top-heavy corporate approach of former owner Halifax Bank of Scotland.

Mr Embley said LSL's contrasting local focus, with the group broken down into small businesses and teams, is part of the reason for its success, and why he won't consider creating an estate agency superbrand.

"They treated it like it was a bank," said Mr Embley. "Estate agency is still very much a cottage industry.

"We've got to replicate the entrepreneurial model with our managers having the ability to compete locally and not hamstringing them with corporate strategies."

But before income growth will come cost cuts. About 800 staff have been taken on, but job losses have included about 150 at its former head office in Halifax.

Duplicated costs have been rooted out, branches moved onto LSL's more reliable IT system, and sites rebranded using cash from the acquisition.

Once complete, LSL expects annual running costs to be slashed by 50m. The restructure is expected to take two to three years, only boosting profits in 2011.

But when the profits do come, the rewards should be significant.

LSL has not escaped the recession unscathed – it cut more than 300 jobs, closed 12 branches and axed its dividend.

Even so, Mr Embley said the business can run profitably on a national rate of 500,000 transactions annually.

He expects about 700,000 mortgage approvals this year, compared to a peak of about 1.5 million and a normalised level of about 1.2 million.

And when "normality" does return to the property market, the greater access to those transactions from the Halifax deal promises to be transformational.

Driven by need to finish the job

Simon Embley became the chief executive of LSL Property Services at the time of its management buy-out of e.surv and Your Move from Norwich Union in 2004.

Mr Embley then went on to lead the group's flotation in 2006.

His previous experience includes establishing Norwich Union's pensions business in Poland for 18 months and in 2000 he was a director of Norwich Union Wealth Management.

Mr Embley, who holds 9.5 per cent of LSL's stock, said he is driven by "being successful and fear of failure". He said: "I've probably got enough money to hang my boots up but I get really excited about LSL because I've only done half the job."

Mr Embley, a Liverpudlian, describes himself as "sports fanatic" and he supports Liverpool FC.