TBarratt Developments’ proposed £2.5bn takeover of smaller rival Redrow will increase the supply of new homes in the UK and give customers more homes, executives of both companies said. It was a “fascinating opportunity” to do many useful things, including: More choices.
At least that’s what they will tell the Competition and Markets Authority (CMA). The CMA may still have something to say about Britain’s biggest housebuilder, which ranks sixth in terms of bulk purchases. I don’t think further consolidation from industry leaders will be much of an encouragement to smaller developers such as: In 1988, 39% of new homes were built; these days, it’s around 1 in 10..
None of this is to deny that Mr. Barratt’s actions were reasonable. However, the fiscal logic seems defensive. Most deals in the industry are driven by the land pipeline, the essential currency for homebuilding, and this score shows how Barratt’s numbers stack up. The plan is to add 24,500 lots to the 68,000 lots. In the public market, it could take Mr. Barratt 18 months to acquire such a portfolio. And given the size of home builders, it would be impossible to accomplish this mission without moving market prices.
It’s worth paying for more of this work, but it also spreads the risk of going through a stickier planning system. And, fortunately for Barratt, it can afford to do so on an all-share deal, as its share price (530p before the announcement) was trading above book value. Therefore, the seemingly large acquisition premium of 27% over Redrow may be justified. This was enough to persuade Steve Morgan, the developer’s astute founder and his 16% shareholder, to sign up. If he joins, Redrow’s other investors will likely follow suit.
Plus, there will be cost savings to be shared around the combined entity (which, boringly, will be called Barratt Redrow rather than Valor). That’s easy to understand too. It is relatively easy to reduce costs by harmonizing supply chains and closing redundant regional offices. The one-off cost of integration is estimated at £73m, so the annual ongoing award of “at least £90m” by year three is attractive.
This is certainly more persuasive than Barratt chief executive David Thomas’ elaborate pitch for a three-pronged brand strategy (the third being the name of the acquirer’s incumbent, David Wilson). be. Perhaps splitting the development site between brands nominally targeting first-time buyers, families, and “downsizers” could help move more units faster. However, prospective buyers are definitely more interested in the quality of the home than in the marketing strategy of differentiation.
The real test for outsiders is whether the deal actually increases the supply of new housing. Promises on this front were surprisingly lax. “Over the medium term” it has “accelerated capacity” to more than 22,000 homes a year. Well, it’s probably going to be a very good year. But judging by recent deals (including a 29% decline in Barratt’s deal volume in half a year), it’s still far from where it started overall.
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So even if the stock market reaction is muted (Barratt’s shares fell 5%, Redrow’s rose 15%), the deal works out well for both companies. But broader benefits are hard to find. This looks like the two companies will be working together to make some savings and wait to see if sales pick up to tide them over the downturn in trading. As the CMA conducts research into the house construction market, it is necessary to properly investigate rafters.
