Deals

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

The last time British housebuilders were in a dealmaking mood, things turned ugly -- fast.

In 2007, George Wimpey Ltd and Taylor Woodrow Plc joined forces and Barratt Developments Plc purchased Wilson Bowden Ltd. Not long afterwards, slumping house prices exposed the sector’s over-reliance on debt and rights issues followed.

Ten years later builders are again eyeing up a rival. Redrow Plc and Galliford Try Plc have both approached Bovis Homes Group Plc. Bovis has rejected both approaches but remains in talks with Galliford.

With Theresa May's government about to trigger the start of potentially destabilizing Brexit talks and British house prices already looking stretched, you'd be forgiven for being twitchy about the return of deals in the sector.

Still, this may not be deja vu all over again. Not only is the Bovis situation fairly unique (it's suffered from operational troubles), U.K. homebuilders also appear to have learnt a lesson from the financial crisis: most are net holders of cash and mean to return much of it to shareholders, rather than chasing deals.

Surer Foundation
U.K. homebuilders have cut debt since the 2008 crisis
Source: Bloomberg
Net debt shown as negative number

And while the London property market shows signs of cooling, the rest of the country looks OK, thanks partly to government subsidies of home purchases.

Yet somehow Bovis has contrived to spurn its good fortune. CEO David Ritchie quit in January after the company struggled to deliver homes on time and customers complained about shoddy construction.

Despite controlling a land bank centered mostly on the south of England, where house prices are highest, Bovis investors haven't shared in the construction industry's post-Brexit rebound. It trades on a modest 1.05 times estimated net tangible asset value (the value in a break-up), compared to a sector average of 1.45 times, according to Canaccord Genuity. 

Bother at Bovis
Bovis' operational difficulties have caused its shares to lag
Source: Bloomberg

If an acquirer could get Bovis shares to trade on a similar multiple to peers, they’d be worth 1,150 pence, Cannacord reckons -- and that's before you factor in synergies.  That's not so outlandish: immediately before the Brexit vote, Bovis shares were 1024 pence. 

No surprise then that suitors are circling. Even so, it won’t have taken Bovis chairman Ian Tyler long to reject Redrow’s 784p low-ball cash and share offer. True, taking on Bovis’s troubles entails risk as well as an opportunity. Yet Bovis stock rose to 924 pence on Monday, implying that shareholders agree that, on balance, it’s worth much more than Redrow made out.

Unless Redrow can be persuaded to be more generous, Galliford’s 886p all-share offer looks a more reasonable basis for talks, albeit with caveats.

What makes an all-share deal look better? Roughly 40 percent of Galliford and Bovis’s share capital is controlled by the same group of top fund managers, by my calculation.  Their interests wouldn't be served by Galliford leveraging up to pay a big cash premium.

Yet even those investors who hold only Bovis stock have more to gain from an all-stock deal. They would share fully in the new management's efforts to fix Bovis, plus any synergies -- instead of bailing out for cash when the shares are hobbled.

True, Tyler might argue he doesn’t need help putting things right. If Bovis stays independent, any uplift from a turnaround would accrue to its shareholders alone. Nor is Galliford a perfect suitor. Its homebuilding unit is smaller and its exposure to other lower margin construction markets makes it less attractive.

Yet Bovis hasn't found a permanent CEO  and who's to say its troubles are over. Having had to lower home production rates, operating profit should stagnate this year. So debate will probably shift to the fairness of the share exchange ratio. Galliford’s proposal would have given Bovis shareholders 47.75 percent of the combined company, a 7 percent premium to the undisturbed price. Monday’s share price jump suggests Bovis investors expect rather more. 

Still, Tyler mustn't overplay his hand. Fixing Bovis could take a couple of years, by which time who knows what impact Brexit may have had on housing. Having flunked the golden opportunity of the government's first-time buyer support, the company may not want to spurn another.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. In contrast, chairman Steve Morgan owns 40 percent of Redrow.

  2. But read Bloomberg's Matt Levine on the risks that a highly concentrated investor base poses

To contact the author of this story:
Chris Bryant in Berlin at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net