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About-Face for CBRE

CB Richard Ellis has developed a flair for the dramatic. Only seven months after shaking up the commercial real estate industry with its acquisition of Insignia/ESG, the Los Angeles based brokerage firm caused a stir in February when it announced plans to raise $150 million through an initial public offering (IPO). Although company officials remain mum on the subject, citing SEC quiet period rules, market observers are buzzing about the timing of the decision and the underlying reasons.

“These brokerages just don't need to be public. It's remarkable to think that it's happening again,” says one Wall Street real estate analyst, who asked not to be named. “This is all about making money, and they borrowed a lot of money to go private.”

Bruce Mosler, president of U.S operations at closely held Cushman & Wakefield, a fierce competitor, believes the public model is a handicap for many companies. “The luxury of being private is that it allows us to invest in our business,” says Mosler, adding that “the public model hurts a company's ability to look forward.”

For its part, the analyst community has tended to overlook the public brokerage sector. Real estate cycles also make it very difficult — some might argue impossible — to predict revenues. It hasn't helped matters that the slump in commercial real estate leasing activity has led to sharp declines in revenues at brokerage services companies and forced layoffs.

The company's Feb. 17 filing with the Securities and Exchange Commission states that IPO proceeds will be used to pay off debt and “for other corporate purposes.” The filing did not reveal the number of shares, estimated offering price or when the shares would be sold.

That information will presumably be released once joint underwriters Credit Suisse First Boston and Citigroup Global Markets have priced the company. The final offering price will not be set until the day before the stock begins trading. Meanwhile, SEC approval for the IPO can take as long as several months,

CBRE currently has roughly $800 million worth of debt on its balance sheet. The IPO plan comes on the heels of CBRE's acquisition of Insignia Financial Group for $431 million. CBRE posted a $10.1 million net loss for the fourth quarter of 2003 compared with net income of $15.1 million during the same period a year ago. CBRE blames the loss on costs associated with the merger and integration-related charges. Still, CBRE posted $1.6 billion in revenues for 2003.

The once moribund IPO market has been reinvigorated this year. Through the end of February, 20 companies had gone public in the U.S., which is the fastest rate of new IPOs since 2000. Yet one real estate consultant believes that all IPOs are not created equal, given market cap disparities.

“It's a challenge for small-cap public companies today because of the increased corporate governance requirements and higher costs,” says Dale Anne Reiss, Ernst & Young's global industry leader for real estate.

Not that it was ever that cheap to go public. Back in 1996, the SEC pegged the average cost of issuing an IPO at 16% to 17% of the total offering. In CBRE's case, that would mean spending a minimum of $25 million to go public once again.

Adds Reiss: “Hopefully any companies doing this believe that the benefits of being public are correspondingly higher.” To Blum Capital, which owns a 67% stake in CBRE, those benefits might be too hard to resist.

IPO Repeat: CB Richard Ellis Has Straddled the Line Between Public and Private Over the Past 10 Years

November 1996

CB Commercial goes public. Insignia Financial Group buys New York City brokerage ESG the same year.

May 1998

CB Commercial merges with Richard Ellis to become CB Richard Ellis (CBRE).

July 2001

Blum Capital Partners leads an $800 million buyout of CBRE, taking the firm private.

July 2002

The firm hires New York broker Mary Ann Tighe from rival Insignia/ESG, which leads to further defections.

July 2003

CBRE buys Insignia Financial Group for $431 million.

February 2004

CBRE announces plans to float $150 million IPO.

Source: CBRE

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