Agency directors likely to sit tight after flotation

Although the flotation of Sherry FitzGerald on the Irish Stock Exchange is expected to put a value of between £16 million and £20 million on the company, the directors are unlikely to sell more than a 25 per cent stake initially.

The company returned a profit of £1.2 million last year on fees of just over £9 million. Sales of new and second-hand houses accounted for £6 million of the fees, with the balance coming from its commercial property wing. The residential service turned in about 67 per cent of the profits. Sherry FitzGerald's expansion in recent years has been funded mainly from profits and contributions from shareholders. If the company succeeds in raising £3.5 million from the sale of shares, it will first repay £500,000 in shareholders' loans. The 28 shareholders are also likely to sell about £1 million worth of shares. The balance of £3 million accruing to the company is to be used to speed its expansion plans.

A small proportion of it will be spent on opening offices in Limerick, Cork and possibly Belfast. The company also has to part-fund the development of a national property franchise service. About 10 provincial agents have apparently agreed to join the franchise company and in the long term, it is hoped to expand the network to about 40 agencies. The group chairman and chief executive, Mark FitzGerald, is the single largest shareholder with a stake of about 15 per cent. James Meagher holds 8 per cent of the shares, while five other executives each have 7 per cent. These are Phillip Sherry, Simon Ensor, David Lewis, Gordon Gill and Killian O'Higgins. The remaining 50 per cent shareholding is divided among 21 directors. The company is to offer a share options scheme to all its 176 staff.

Sherry FitzGerald's philosophy is to reward its most senior staff with shared ownership of the company. It has 28 directors, compared with 13 in the Hamilton Osborne King estate agency, a company with about the same turnover. The Lisney agency has nine directors.

Mark FitzGerald's democratic approach has ensured that the company has an exceptionally loyal staff who seldom move to other agencies. Like other agencies, it offers a fairly generous bonus system linked to new business and sales. Negotiators with about three years' experience can expect to earn at least £25,000.

In recent years, Mark FitzGerald has stood back from day to day activities to concentrate on future strategy for the group. This has allowed him to appoint Claire Cullinan and Killian O'Higgins as managing directors of the residential business and commercial division, respectively. Only three of Sherry FitzGerald's directors are non-executive, and two of them were recently appointed to help with the floatation. These are Donal Chambers, former managing director of AIB Corporate Finance; Louise English, a former head of business development of the Investment Bank of Ireland; Gerry Murphy, a former director of First Active Building Society. Sherry FitzGerald was founded in 1982 and quickly built up a reputation as a young, innovative company that targeted the middle class market.

Its strategy paid off in the first property boom in 1989/1990 and by the time the current boom began in 1994 it had an exceptionally strong client base. It is now the largest residential agency with 12 branches. Its main operating area is middle-class Dublin with houses tending to fall into the £150,000 to £500,000 bracket. While it has made some inroads at the top end of the market, it still has not displaced Lisney, which handles the lion's share of Dublin's most expensive houses.

Its heavy reliance on the buoyant housing market for most of its profits (it sold more than £400 million worth of new and second-hand houses in 1998) sets the company apart from three of the other large estate agencies in Dublin. Hamilton Osborne King, Lisney and Gunne have a more equal spread of residential and commercial business. Douglas Newman Good operates two distinct companies, one residential, the other commercial.

The property industry has been notoriously cyclical over the years. Sherry FitzGerald's main rivals would contend that the commercial sector is more stable in the long term because of follow-on business. Almost a year ago, Sherry FitzGerald sold a 20 per cent stake in its commercial division to one of Britain's largest property consultancies, Debenham Tewson Chinnocks Holdings plc. The sale brought in £765,000 in cash and shares but, more importantly, it gave the Dublin company access to an international network of estate agencies who look after the property interests of a formidable range of multinational companies.

The link up with the London company has also allowed the Dublin agency to develop its commercial division as a separate entity, trading as DTZ Sherry FitzGerald.

The alliance with DTZ has already brought in a number of interesting and profitable referrals. For example, the acquisition of a 70,000 sq ft premises in west Dublin for Xerox would have earned a fee of 1 per cent on the £5 million purchase price; similarly the assignment of the former US Robotics premises at Richview Business Park is thought to have brought in about £30,000.

Commercial investors and developers tend to stay with the same agency as long as it generates investment and development opportunities. In a strong market, fee-cutting is considerably more rare than in the housing market. DTZ Sherry FitzGerald earns most of its fees from office lettings and acquisitions and from the sale and purchase of development land. Last year, it was one of the top players in the office market - in one deal alone it let 140,000 sq ft of space to the US computer company Compaq - yet it has failed to make any real impact in the thriving retail sector.

Sherry FitzGerald's choice of Goodbody Corporate Finance to handle its stock market flotation is hardly surprising, considering it is a subsidiary of AIB, a company that gives most of its work to Sherry Fitz. It has just completed a revaluation of all AIB premises in Ireland and overseas.