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Real EstateBrokerageIPO / M&A

Compass scales back IPO valuation target to $7 billion

New York brokerage has already decided to offer fewer shares, at a lower price

That was fast. Eight days after Compass unveiled a hoped-for Wall Street valuation of over $10 billion, the New York City-based residential brokerage has significantly scaled back its ambitions for an initial public offering.

Compass is now offering 25 million shares of Class A common stock to potential shareholders at $18-$19 per share, according to a filing Tuesday with the Securities and Exchange Commission, which calculates into trying to raise $463 million at the mid-point.

That’s 48 percent less than what Compass was hoping to raise a week ago from its stock offering.

The brokerage had announced it was trying to manufacture $882 million through the sale of stock at $23-$26 per share. That share price would have given the company a roughly $10 billion market capitalization (a figure arrived at by multiplying the $23-$26 share price by the total number of publicly available and non-public shares, which is about 400 million).

The price reduction docks Compass’s target market value to around $7 billion.

The SEC filing does not say why Compass retreated from its initial share price, and a message left with the company Wednesday was not immediately returned.

Based on the documents Compass filed with the SEC, it looks poised to go public on Thursday.

Founded in 2013 by software engineer Ori Allon and former Goldman Sachs manager Robert Reffkin, Compass has raised a reported $1.6 billion in venture capital money, enabling the firm to recruit top talent and acquire major brokerages including San Francisco’s Pacific Union.

In just eight years, Compass has rocketed to no. 2 in sales volume among all brokerages, trailing only Realogy, according to RealTrends data released last week.

However, Compass has lost a significant amount of money each year, posting a $270 million net loss for 2020. The company generated $664 million in total revenue, which came entirely from the remainder of commissions it receives from affiliated agents.

Compass calls itself a technology company, and the initial share price reflected a valuation that Wall Street typically bestows on businesses with an extraordinary tech product.

The revised hoped-for valuation puts Compass closer to Bellingham, Washington-based brokerage eXp, which had a market cap of $6.4 billion at close of business Tuesday.

Compass is most often compared with brokerage conglomerate Realogy – the owner of Coldwell Banker, the Corcoran Group and Century 21, among other brands – which the perennial no. 1 in national sales volume. Realogy had a market cap of $1.8 billion as of Tuesday, with shares trading at $15.24 each.

The SEC filing does provide a few new snippets of information.

The family of Reffkin, Compass’s CEO and chairman, has “indicated an interest in purchasing up to 18.5 million in shares” at the revised offering price.

An indeterminate number of shares will also be purchased by SVF Excalibur (Cayman) Limited, a subsidiary of Tokyo-based SoftBank, Compass’s main VC financier.

Also, the IPO’s underwriters – Goldman Sachs, Morgan Stanley, and Barclays – may purchase up to 3.75 million shares with an undisclosed “underwriting discount.”

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