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DTZ (DTZ)

Created:

3 July 2008

Written by:

Claer Barrett

BEAR POINTS:

• Worsening global property market

• Loss of US partner to major rival

• Trouble integrating acquisition

• Chief executive to leave shortly

BULL POINTS:

• Asian business still strong

• Speculation of management buyout

Property services firm DTZ knows only too well that its market is shrinking. Last week, its Money into Property report predicted that global property investment transactions would fall 30 per cent in 2008. Such deals generated nearly a third of DTZ's 2007 revenues, and the downturn has already resulted in two profit warnings.

In poor times property advisers take comfort from so-called 'tenant rep' - being retained to advise large corporate clients on their real-estate strategies. With the advent of globalisation, such contracts have become lucrative worldwide mandates. So, in a downturn, plenty of work can be found helping corporate clients to manage their existing portfolios.

The trouble is, DTZ looks as though it is losing out to bigger competitors. For major corporate property investors, it is vital that their advisers can provide advice across the world, and can market properties internationally. This has resulted in two key trends: property services becoming a global industry in its own right, and increasing consolidation as companies spread their reach around the world.

In 2007, perhaps 50 small- to medium-sized practices worldwide were gobbled up by the giants of property services, CB Richard Ellis and Jones Lang LaSalle. The US has been the chief battleground for such deals. Richard Ellis spent $1.12bn (£56m) acquiring Trammell Crow in 2006. And, ominously, last month DTZ's eight-year-long deal-sharing alliance with US corporate advisory specialist Staubach was severed when Jones Lang LaSalle swooped to acquire the firm for $613m (£312m).

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DTZ claims the loss of Staubach will not affect its profits, although Jones Lang hopes to add $400m to its annual revenues at a tasty 20 per cent profit margin. The Staubach arrangement had been expected to end with DTZ buying the business, which serves clients including PepsiCo and Texas Instruments with 1,600 staff from 70 US offices. So its loss to a key rival has surely weakened DTZ's access to corporate America. It now has just 600 US staff, compared with Jones Lang's 11,500 and Richard Ellis's 18,200. Trying to be a global player without a significant US platform is tough to say the least, and the chances of acquiring another US partner seem bleak. Nor is it likely to help that DTZ's chief executive, Mark Struckett, has announced his intention to step down.

DTZ's remaining US activities includes a 50 per cent stake in loss-making investment broker Rockwood, which is expected to result in a £12m impairment charge in 2007-08's profits, which DTZ will announce next week. Analysts are not expecting the numbers to be pretty - stockbroker Arbuthnot believes that, after various exceptional charges, DTZ will post a small net loss. Following DTZ's March profit warning, Arbuthnot slashed its earnings forecast for 2007-08 by 39 per cent to 16.7p, and would not be surprised if DTZ cut its dividend.

Last year, DTZ sank £60m into acquiring UK shopping centre management specialists Donaldsons - the integration of which has generated an exceptional charge of £5m. But several of the merged company's disgruntled stars have been picked off by rival firms. At least DTZ's Asian exposure remains a bull point - in the first half of 2007-08, revenues increased 317 per cent year on year to £44.1m and the region has yet to feel the bite of the credit crunch. In addition, there is growing industry speculation that the firm could be bought by management. Yet even if DTZ's bosses got the support of French 27 per cent shareholder Groupe CM, they may well to raise finance in view of current market conditions.

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