The way the bosses of the two companies told it, Barratt Developments’ proposed £2.5bn takeover of smaller rival Redrow was “a compelling opportunity” to do lots of virtuous things, such as increase the supply of new homes in the UK and give customers more choice.
That, at least, is what they’ll be telling the Competition and Markets Authority (CMA), which may yet have something to say about the UK’s biggest housebuilder by volume buying the sixth largest. More consolidation at the top of the industry hardly seems likely to offer much encouragement to smaller developers who built 39% of new homes back in 1988 but these days do about one in 10.
None of which is to deny that Barratt’s move makes sense for it. It’s just that the financial logic looks defensive. Most deal-making in this industry is driven by land pipelines, the essential currency of housebuilding, and one can see how the numbers stack up for Barratt on that score. It will get 24,500 plots to add to its 68,000. In the open market, it might take Barratt 18 months to acquire such a portfolio – and, given the housebuilder’s size, the task would be impossible to achieve without moving market prices.
It’s worth paying up for such a job lot, which also spreads the risks of getting through a sticky planning system that has become stickier. And, happily for Barratt, it can afford to do so in an all-share transaction because its own share price (530p before announcement) was trading above book value. A chunky-looking 27% takeover premium for Redrow can therefore be justified. It was enough to persuade Steve Morgan, the developer’s astute founder and 16% shareholder, to sign up. If he’s on board, Redrow’s other investors will follow.
On top, there will be cost savings to share around the combined entity, which, boringly, will be called Barratt Redrow rather than, say, Barrow. Those are also easy to understand. It is relatively simple to find savings by harmonising supply chains and closing overlapping regional offices. The one-off costs of integration are put at £73m, so an annually recurring prize of “at least £90m” by the third year is attractive.
It is certainly more convincing than the Barratt chief executive David Thomas’s elaborate pitch about a three-pronged brand strategy (the third one being the acquirer’s existing David Wilson name). At the margin, maybe carving up a development site between brands nominally aimed at first-time buyers, families and “downsizers” helps to shift more units more quickly. But would-be buyers are surely more interested in the quality of the home rather than the marketing spiel about differentiation.
For outsiders, the real test is whether the deal will really increase the supply of new homes. The promises on that front were gloriously loose – there will be “a capacity to accelerate” to more than 22,000 homes a year “in the medium term”. Well, maybe in a very good year. But the combined starting point, to judge by recent trading (including the 29% fall in completions for Barratt at the half-year), is a long way short of that.
This deal, then, works for the companies, even if the stock market reaction was muted (Barratt’s shares fell by 5%, Redrow’s rose 15%). But any wider benefits are hard to spot. This looks like two companies coming together to get through a slow trading period by reaping some savings and waiting to see whether sales pick up. The CMA, which helpfully has a study on the housebuilding market in progress, should have a proper poke around the rafters.
