- Deal creates UK’s biggest housebuilder
- Barratt paying a 27% premium on paper
- Both firms report improving sentiment
The housebuilding sector received a major confidence boost with the news Barratt Developments (BDEV) had agreed to acquire smaller rival Redrow (RDW) to create the UK’s largest quoted developer.
Redrow shares jumped 13% to 678p, followed by Crest Nicholson (CRST), possibly the most-touted takeover target, with a gain of 5% to 220p, and Bellway (BWY) with a gain to 2% to £28.12. Barratt shares fell 7.5% to 490p.
BETTER TOGETHER
Under the terms of the deal Barratt will issue new shares with Redrow investors receiving 1.44 new Barratt shares for each Redrow share, representing a premium of roughly 27% to last night’s closing price of 600p and valuing the whole business at just over £2.5 billion.
The firms claim that by combining they will create ‘an exceptional UK homebuilder in terms of quality, service and sustainability, delivering excellence and driving innovation for customers, employees, sub-contractors and the supply chain’.
Geographically and in terms of brands the two businesses are a good fit, and there is the potential to make big cost savings both on procurement and through streamlining the management structure.
Moreover, as shown by Barratt’s interim results – also released today – life for the housebuilders isn’t particularly rosy, although the firm said it had seen signs of improvement in both reservation rates and buyer sentiment since the start of the year.
For the six months to December, home completions were down 28.5% from 8,626 units to 6,171 units as the company managed its build activity, which translated into a 70% drop in pre-tax profit from £521 million to £157 million.
Redrow showed a similar drop in build activity, although the drop in pre-tax profit was less dramatic, and it also said it had seen an uptick in private reservations since the start of January.
EXPERT VIEWS
Leaving aside potential competition issues, AJ Bell investment director Russ Mould commented: ‘The deal has logic for Barratt as Redrow has consistently traded at a discount to much of the sector and is well diversified across different parts of the UK – apart from the London market which it exited a few years ago. It also doesn’t seem to have major skeletons in the cupboard around build quality or corporate governance like some of its peer group.’
Oli Creasey, property fund research analyst at Quilter Cheviot, observed: ‘Looking at share prices, the deal is an attractive one for Redrow shareholders, who get a boost to the undisturbed share price, and become holders in a much larger business.
‘It is less clear what the advantage is for Barratt, although given the structure of the deal, there’s limited downside – the all-share deal means that no cash needs to change hands, and the balance sheet strength is unchanged. It should also be noted that at a price equal to 1.2x Redrow’s NAV, it isn’t a particularly expensive price being paid, and will create the undisputed largest public housebuilder in the UK.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Ian Conway) and the editor (James Crux) own shares in AJ Bell.
