March 26 (Bloomberg) -- Taylor Woodrow Plc and George Wimpey Plc will merge to form Britain's biggest house builder, countering increased competition at home and a property slump in the U.S. Shares of both companies surged to a record.

Investors in Solihull, England-based Taylor will hold 51 percent of the combined business following the all-stock transaction and Wimpey's will own 49 percent, the builders said in a statement today. The new company will have a market value of more than 5 billion pounds ($9.8 billion).

Taylor Wimpey Plc will have 6.7 billion pounds in sales and build 31,000 homes a year at sites from London to Texas. The companies plan to close offices, fire workers and secure better terms with suppliers to halt a decline in profit margins and compensate for falling house prices in the U.S., which accounts for a third of sales. A shortage of land in the U.K. has fueled a record 12 months for building mergers.

``This is a company that will have much more clout and buying power,'' said Stuart Fraser, who helps manage the equivalent of about $39 billion at Brewin Dolphin Securities Ltd, including homebuilder stocks. ``Self-preservation isn't a bad reason for these two to come together.''

Shares of Taylor rose 54.5 pence, or 13 percent, to 475 pence, the biggest jump since Feb. 25, 2000, for a market value of 2.76 billion pounds. London-based Wimpey gained 18 pence, or 2.8 percent, to 653 pence and is worth 2.62 billion pounds.

Barratt, Persimmon

The creation of Taylor Wimpey comes after Barratt Developments Plc last month bought Wilson Bowden Plc for 2.2 billion pounds, surpassing August's 1.1 billion-pound purchase of McCarthy & Stone Plc by British lender HBOS Plc and retail entrepreneur Tom Hunter. Persimmon Plc bought Westbury Plc for 643 million pounds nine months earlier.

Wimpey Chief Executive Officer Peter Redfern, hired last July, will take charge of the merged company, which will have its head office in London. Taylor Woodrow CEO Ian Smith, who joined in January, will leave.

Taylor builds family houses and apartments in the U.K., Spain, Canada and the states of Arizona, Texas, California and Florida, where it's the leading golf-course developer. Wimpey operates in Britain and the same four U.S. states plus Georgia, where its Morrison homes division is currently based.

Savings Target

Taylor Wimpey aims to save 70 million pounds a year by cutting headcount, picking the most lucrative sites from an enlarged land bank and using its buying power to trim timber, brick and cement bills by as much as 3 percent, said 36-year- old Redfern. It will book a one-off charge of 60 million pounds, mostly this year, for measures to improve efficiency.

Taylor has the larger land holdings, including high-value ``strategic'' sites in the U.K. The new company will follow the business structure of Wimpey, which has lower costs. The pair sold a combined 31,128 homes last year.

``The two business can improve profitability more quickly together than they could have done on their own,'' Redfern said.

Taylor Wimpey will construct 22,000 homes a year in the U.K., or about 12 percent of the new-build market, the CEO said. Barratt is next with 20,000, including Wilson Bowden. Persimmon ranks third and sold 16,700 homes last year.

HBOS, Britain's biggest mortgage lender, estimates U.K. house prices will increase by 4 percent this year following a 160 percent jump in the past decade. Prices in England and Wales climbed the most in almost four years in March as gains in London spread further afield, Hometrack Ltd. said today. The average cost of a home rose an annual 6.7 percent to 173,400 pounds, the London-based research company said.

U.S. Decline

By contrast, new home sales in the U.S. dropped 18 percent last year, the sharpest contraction since 1990, as borrowing costs rose and buyers lost confidence. They fell again last month, reaching the lowest level in almost seven years, the Commerce Department said today, dimming prospects for a quick revival. Economists had forecast a gain.

Taylor's average selling price in North America fell 5.5 percent to $427,000 in 2006, while Wimpey last month booked a 60.7 million-pound charge against the value of U.S. land after scrapping purchases.

Taylor Wimpey will be the 13th-biggest homebuilder in the U.S. and will make regional purchases there with the aim of ranking third or better in each of the states where it operates, Redfern told reporters today. The company's American operations will be based in Florida.

Profitability at both companies has lagged behind rivals. Operating income was last year equivalent to 12 percent of sales at Taylor and 13 percent at Wimpey. That compares with a margin of 20.8 percent at Persimmon and 16.3 at Barratt. Redfern said he's targeting a figure of 18 percent.

Underperformers

``Neither house builder has been performing particularly well,'' said Kate Moy, an analyst at Teather & Greenwood in London who rated Wimpey ``hold'' and Taylor ``buy'' prior to today's announcement. ``Putting two underperforming businesses together does not necessarily create a good one.''

Still, combining Wimpey, a ``more efficient'' operator, with the strength of Taylor's land holdings may lead to improved performance, she said.

Norman Askew of Taylor will be chairman of the new company, with Peter Johnson, also of Taylor, finance director. Wimpey's Ian Sutcliffe will take charge of U.K. operations and John Landrum of Taylor will head the North American division. Outgoing Taylor CEO Smith, 53, said he'll leave mid-year and hasn't yet discussed a possible pay out.

The companies said they reserve the right to complete the transaction through an offer for Wimpey by Taylor. Taylor Woodrow had net debt of 391 million pounds as of Dec. 31. Wimpey's debt was 381 million pounds at that time.

Private Equity Interest

Though a deal has been agreed, Brewin Dolphin's Fraser said a private-equity bid can't be ruled out, while Man Securities analyst Tobias Woerner said parties including Persimmon may make an approach for Taylor. London-based Woerner, who rates both stocks ``neutral,'' said creating Britain's biggest homebuilder ``carries considerable integration risk.''

Wimpey, founded as a London stone mason in 1880, has a history of growing through acquisitions. It bought McLean Homes in 1996 from Tarmac Plc, McAlpine Homes from Alfred McAlpine Plc in 2001 for 461 million pounds and Laing Homes in 2002 from John Laing Plc for 297 million pounds.

Taylor takes its name from Frank Taylor, who began building houses while still a teenager in 1921 and who as a minor needed his uncle, Jack Woodrow, as a legal partner, according to Hoover's Inc. The company has been behind some of the biggest U.K. housing takeovers in recent years, acquiring Bryant Group Plc for 652 million pounds in April 2001 and Wilson Connolly Holdings Plc for 660 million pounds in November 2003, a record that wasn't surpassed until Persimmon bought Westbury in 2005.

Taylor is being advised by UBS AG and Morgan Stanley, while JPMorgan Cazenove Ltd. is sole adviser to Wimpey and ABN Amro Holding NV's Hoare Govett is broker.

To contact the reporters on this story: Sophie Kernon in London at skernon@bloomberg.netBrian McGee in London at bmcgee3@bloomberg.net

Last Updated: March 26, 2007 12:46 EDT