OnTheMarket To Be Sold? US Investor Pens Open Letter to Shareholders Outlining His Vision

This one is already a nominee for "most unexpected headline of 2023" at Online Marketplaces.

A US investor by the name of Brett Stone has taken the audacious step of writing an open letter to OnTheMarket shareholders to describe his plans for the UK challenger portal, including a 10% pay increase for all employees and how he would take a management position in the company.

If Jason Tebb was sweating, no worries—Stone has guaranteed that Tebb would remain at OnTheMarket should he become involved with the portal.

In his 1700 word manifesto, Stone addresses issues including OTM's portrayal of its intentions to stakeholders, Rightmove and Zoopla, and an invitation for stakeholders to share their views on how happy they are with OnTheMarket.

We'll let you read the rest. The full transcript is below:

Dear OnTheMarket stakeholder,

OnTheMarket’s Agents’ Mutual was incorporated 10 years ago today, to save estate agents money advertising their property listings.

Collectively, estate agents now pay more than twice as much to Rightmove, Zoopla and OnTheMarket (OTM) than they did to Rightmove and Zoopla before OTM started.

Property transaction experiences have not materially improved for estate agents or consumers in the United Kingdom either, due in part to a lack of innovation and investment by all three property portals.

I am writing to you because I believe:

• OTM’s current prospects and intentions do not match the story being portrayed to you by OTM’s board, which is led by Christopher Bell (non-executive chairman); and
• OTM requires change to deliver material benefits for members, shareholders and members’ customers in the months and years ahead.

These two opinions have been formed after:

• carrying out an in-depth and wide-ranging analysis of OTM, its global peers, operating environment and the whole property commerce category;
• conversations with OTM’s shareholders, members, member’s customers, advisers, employees and other industry stakeholders; and
• two decades working in and on marketplace and information businesses and solving problems for companies’ stakeholders.

The aim of this letter is to request your input, ask for your help and inform you about:

• The current situation
• My interest and actions
• Bell, Tebb and the board’s actions and interests
• Some non-member shareholders’ interests
• Possible next steps and how you can help

The current situation

From next month, I understand that:

• a significant number of the 3,039 estate agent branches that signed listing contracts before OTM’s initial public offering will be able to cancel their contracts for the first time in five-years; and
• members will be able to sell a significant number of shares for the first time in five years from 09 February 2023, due to the expiry of initial public offering share lock-in agreements.

OTM made no reference to these two important events in their 25 January 2023 trading update, even though they could significantly impact the future of OTM.

Members own approximately 45 million shares, although not all will be released from their lock-in agreements on 09 February.  OTM has not disclosed the exact number that will, as far as I am aware.

Over the last three months, I have met with estate agents big and small to understand their views.  Each has a unique set of circumstances, but the majority are seriously questioning whether it is worth continuing to pay to list their properties on OTM.

Why? 1) OTM has failed to deliver on its founding mission to rebalance the power between agents and Rightmove and Zoopla; 2) OTM lacks scale and has significantly underperformed; 3) rising interest rates, high inflation and property market uncertainty makes OTM an increasingly unnecessary expense.

1) OTM has failed to deliver on its founding mission to rebalance the power between agents and Rightmove and Zoopla

Since OTM was founded, Rightmove has:

• increased its top line 2.5 times;
• taken £2.03 billion in cash from the industry (excluding 2022);
• spent £1.16 billion on dividends and buybacks (excluding 2022); and
• delivered a 76% underlying operating profit in 2021.

This means collectively agents are now paying significantly more for Rightmove, Zoopla and OTM than they did to Rightmove and Zoopla before OTM started.

2) OTM lacks scale and has significantly underperformed

• 47% decline in OTM’s share price from 31 December 2021 to 30 December 2022;
• 185 less agent advertisers from January 2021 to July 2022, making OTM less appealing to consumers.
• declining traffic growth relative to Rightmove, and Rightmove has approximately nine times more traffic, making OTM less appealing to members; and
• a not insignificant number of OTM leads appear to be spam, wasting agents’ time and inflating lead numbers.

3) Rising interest rates, high inflation and property market uncertainty makes OTM an increasingly unnecessary expense

My interest and actions

On 03 October 2022 I sent a friendly proposal to OTM’s board.

Its purpose was to deliver material benefits for members, shareholders and members’ customers over the next 12 months and over the next 25 years.

My proposal included the offer of new capital, putting OTM on a similar financial footing to Rightmove and Zoopla, and a commitment to:

Members to…

• cap member listing fees at a fair level in perpetuity;
• retain and improve members’ influence;
• increase spending on marketing and agent onboarding;
• invest in new products and services that benefit members and members’ customers;
• hire additional talent with digital product and marketplace expertise;

Shareholders to…

• keep OTM listed for all shareholders to be able to buy and sell shares at will;
• keep OTM listed for all shareholders to benefit from future value created;
• provide an opportunity for members and shareholders to invest more capital if they choose;
• buy back shares from shareholders who require liquidity;

Employees and the board to…

• raise all employees’ wages by 10%;
• guarantee Tebb’s employment; and
• retain Bell as non-executive chair.

And, I would join OTM’s management team full-time, in a strategy and business development role, after completion of an investment.

My proposal had something for everyone, disadvantaged no one and benefited all stakeholders, in my considered opinion.

Bell, Tebb and the board’s actions and interests

Christopher Bell (non-executive chairman) and the board’s response has been that they have no interest in receiving or discussing any proposal of any kind.

Today, Jason Tebb (chief executive officer) said he would be willing to meet, but not until the 20 February 2023 or later.

Why would Bell, Tebb and the board wait nearly five months before being willing to spend any time discussing a proposal with me, that could deliver material benefits for all members and shareholders?

My guess is that they:

• like the lack of accountability that the current highly fragmented share register provides; and
• their interests are not aligned with members or shareholders.

OTM has lost ground to Rightmove, in 2022 OTM’s shares declined 47%, and:

• Bell received a 10% pay rise to £110,000 in a non-executive role;
• £401,000 was paid to Tebb in the year ending January 2022;
• 2.37 million options were issued to employees, equivalent to 3.13% of shares in issue;
• 1.52 million options have been issued to Tebb since December 2020; and
• 720,224 options were issued to Tebb in 2022.

My understanding of the current OTM plan under Bell is to:

• underinvest in OTM’s member listing service, teams and products (OTM spends less than £30 million operating its portal, while Rightmove and Zoopla both spend around £80 million*);
• promise ‘tech tomorrow’ to justify fee increases, with no clear business case that I am aware of;
• increase fees to existing members and pay themselves well in cash and options;
• not be candid with shareholders and members about the performance and prospects of the business or the risks; and
• return any (if any) excess capital to shareholders (as of 31 December 2022, OTM reported it had £10.4 million of cash, £300,000 less than 23 months earlier and a fraction of that available to Rightmove and Zoopla).

The current plan is short-sighted, not good for members, and fundamentally flawed in my opinion for three key reasons:

1. OTM is not at scale and does not have the market power of Rightmove or Zoopla – OTM needs agents more than agents need OTM;
2. it is resulting in the loss of estate agent advertisers and a declining share of traffic relative to Rightmove, making OTM less valuable to members and consumers; and
3. returning capital when approximately 60% of OTM’s shareholders are members is irrational.  Members pay fees, then receive a taxable return of capital. Why not just let members keep more of their own money and pay less tax by charging lower fees?

*Rightmove and Zoopla are both well-established brands with stronger market positions and could arguably spend less than OTM, however Bryant (Zoopla) and Brooks-Johnson (Rightmove) are both savvy, realistic businesspeople who create value for their shareholders.

Some non-member shareholders’ interests

A minority of shareholders who are not members have suggested I should try and take OTM private, meaning new capital goes to them rather than to improving OTM for members, consumers and employees.

I do not believe a take-private makes sense for OTM and does not interest me.  Why?

One of the things that makes OTM special, is approximately 3,600 hard-working estate agencies own approximately 45 million OTM shares.

To take OTM private would:

• deprive members and shareholders of the ability to freely buy and sell their shares on a public market, based on their own circumstances;
• deprive some shareholders and members the ability to share in any future value that might be created; and
• likely create bad will with some members and accelerate OTM’s decline.

Some non-member shareholders have also told me that they think OTM should:

• keep increasing fees to existing members;
• focus on margin expansion as opposed to developing OTM’s teams, products and relationships; and
• return capital to them (and other shareholders), following Rightmove’s playbook.

For the reasons already explained, I do not believe that this is a viable or credible plan for OTM.

Next steps and how you can help

Before deciding if it is worth the time, capital and scar tissue dealing with Bell, the board and others, I wanted to share the above with you and get your input and views.

If you want to help make OTM better for you and other stakeholders, please share your thoughts with me on anything you think is relevant and:

• If you are happy with OTM today?
• If you are happy with the current market dynamic?
• If you would like to see change?

My email: otm@bnstone.com

Next steps (if any) may include me requisitioning a general meeting with your support to remove Bell from the board and appoint me and/or others, to make the future better than the past for all stakeholders on an expedited basis.

Below is some additional information for you which I recommend reading.  Especially the last section: Important information for all recipients.

Thank you for taking the time to read my letter and I look forward to receiving your email.

I will write to you again once I have received and considered more views.

Yours sincerely,

Brett Stone