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The British housing market did what it does best on Wednesday and split opinion down the middle.
The debate du jour was an all-share approach by the country’s biggest builder, Barratt Developments, for Redrow. Deal terms valued the smaller company’s equity at £2.5bn. That quickly dropped to £2.3bn after a sharp fall in Barratt shares. Redrow’s shares rose 12 per cent, reflecting a 27 per cent premium that was roughly halved by Barratt’s slump.
The mooted tie-up, then, has already wiped out £100mn of shareholder value. But the deal makes sense. In a contorted UK market, scale brings many benefits in planning, financing and operations. Barratt is paying a full price, probably to win over Redrow’s founder, and shareholders may grumble. But appeasing competition authorities may be another hurdle to getting this deal over the line.
The offer, which will hand 32.8 per cent of the combined group to Redrow shareholders, is priced generously. On a tangible book value basis, Redrow shareholders are contributing closer to 31 per cent of the combined group. The price put on Redrow, equal to 1.18 times tangible net asset value, compares with Barratt’s 1.12 times TNAV valuation. That doubtless helped Redrow founder, Steve Morgan, sign up to commit his 16 per cent stake.
The trickier debate is whether consolidation will lead to more houses being built in the UK’s chronically undersupplied market. In theory it might. Housebuilders build only when they can sell homes and make a decent profit. Hence, Barratt completions were down 29 per cent in the six months to December, as rising rates curbed demand.
A bigger group should be better able to navigate the headwinds of regulation, planning and building cost inflation. Once demand returns it could, perhaps, produce more houses. Indeed, cost savings estimated at £90mn, in line with industry averages from previous deals, should be worth in the region of £700mn once taxed and capitalised.
The more cynical view is that, given that the biggest cost of a new building is land, greater concentration of the stuff may mean more scope to control local housing supply and prices.
UK competition regulators are — yet again — delving into this issue more broadly to identify local concentration. The deal could require sales in areas of overlap, to get the watchdog’s blessing.
In a market where the major housebuilders account for about three-quarters of private construction, hopes of more supply to help bring prices down rest on a sector that builds only when it sees prices rising.
Barratt investors may not be wild about this deal. But those depressed by the state of the UK housing market will be even less so.
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