The Private Equity Wizardry Behind Realogy’s Comeback

Realogy, the operator of Century 21 and other real estate businesses, is the Rocky Balboa of corporate America. Left for dead in the financial crisis, Realogy has not only survived but is now in a Rocky-like comeback, planning an initial public offering.

The company’s recent history is also an illustration of how private equity firms — in this case, Leon Black’s Apollo Global Management — can save, not destroy, companies, making money for themselves in good times and bad.

Apollo bought Realogy for some $7 billion in the spring of 2007, contributing about $2 billion of its own money and borrowing more than $6 billion to pay for the deal and to refinance debt.

Private equity may be considered smart money, but this acquisition took place at an extraordinarily bad time. Not only was the deal struck as the housing market was crashing, but Apollo saddled Realogy with too much debt. The company was left nearly bankrupt.

Net revenue plummeted to $4 billion in 2010 from about $6.5 billion in 2006. As revenue declined, the company hemorrhaged cash to pay roughly $600 million a year in interest. By 2009, the company was cash flow negative, kept alive only by additional borrowing.

Investors viewed the company as virtually insolvent — its debt traded at less than 10 cents on the dollar. At the time, Apollo’s $2 billion stake seemed to be worthless. I remember having a conversation in 2009 with a hedge fund manager who couldn’t believe the company was still in existence.

So Apollo tried some financial wizardry.