7th Feb 2024 09:56
(Alliance News) - Analys were eyeing Barratt Developments PLC's GBP2.5 billion takeover offer for smaller peer Redrow PLC on Wednesday, as housebuilders continue to fight against "toxic cocktail" of headwinds.
"The move is a seismic shift for the sector, reflecting not only the challenges which housebuilders have more recently faced in terms of the economic backdrop, but also a move to shore up the capabilities of two major players, with the new 'Barratt Redrow' company having aggregate revenues of GBP7.45 billion," said Richard Hunter, head of markets at interactive investor.
Barratt lost 7.7% to 489.30p each at the London open on Wednesday. The FTSE 100 stock has a market capitalisation of GBP4.77 billion. Redrow jumped 32% to 675.51p each, giving it a GBP2.23 billion market cap.
Under the takeover offer from Barratt, each Redrow shareholder will receive 1.44 new Barratt shares for each Redrow share. Following completion, shareholders in Redrow will hold around 33% of the combined group, while Barratt shareholders will hold around 67%.
Directors of both Redrow and Barratt have unanimously recommended that shareholders vote in favour of the scheme at the court and general meetings.
The combined group will be renamed Barratt Redrow PLC upon completion.
"We believe that the combination will create an exceptional UK housebuilder in terms of quality, service and sustainability, delivering excellence and driving innovation for customers, employees, sub-contractors and the supply chain," said Barratt.
"The combination will bring together two companies with highly complementary geographic footprints and three highly respected brands - Barratt Homes, David Wilson Homes and Redrow - with which to accelerate the delivery of much-needed housing across the UK and provide the opportunity for shareholders to participate in future value creation in the combined group."
ii's Hunter said "the rationale for the deal remains in sharp focus, with the toxic cocktail of housebuilder headwinds continuing to wash through."
"Squeezed mortgage affordability and availability resulted in waning customer demand, while broader concerns over general economic growth, consumer confidence and spending have all darkened the picture. At the same time, the removal of the Help to Buy scheme has removed an important plank from first-time buyers and legacy costs for remedial building work continue to come at a significant cost, totalling some GBP62 million in this period," he added.
Susannah Streeter at Hargreaves Lansdown agrees with Hunter.
She said "The economic winds have not been kind to the housebuilders and Barratt Developments and Redrow clearly believe they’ll be stronger together, giving the new combined company much bigger clout to capitalise on the structural need for housing in the UK."
Looking ahead, Streeter noted that market conditions will remain "tougher" whilst interest rates stay elevated. However, there are signs that "recovery is underway."
It is unsurprising, therefore, that the housebuilder's financials show a strain. In addition to the takeover release, both firms released interim results for the half year ended December 31.
Meanwhile, Barratt reported half-year revenue fell 34% to GBP1.85 billion from GBP2.78 billion a year earlier, while pretax profit plummeted 70% to GBP157.1 million from GBP521.5 million.
In response to the lower profit, Barratt slashed its interim dividend by more than half to 4.4 pence from 10.2p.
Chief Executive David Thomas said: "During the period, we have been rigorous in carefully controlling our build activity, managing our costs, being highly selective in land buying, and driving revenue. These clear priorities have helped maintain the strength of our balance sheet despite lower levels of profitability and ensure we remain resilient and responsive through the cycle."
Home completions in the first half fell 28% to 6,171 from 8,626 a year earlier.
Looking ahead, Barratt said: "Whilst our full year out-turn remains dependent on how the market evolves through the spring selling season, based on the encouraging uplift in reservation activity since the start of January, we now expect to deliver total home completions of between 13,500 to 14,000 in [financial 2024], including [around] 650 [join-venture] completions."
For its part, Redrow said half-year revenue fell 27% to GBP756 million from GBP1.03 billion, with pretax profit more than halving to GBP84 million from GBP198 million and prompting it to halving its interim dividend to 5.0p from 10.0p.
Redrow blamed the results on a "subdued housing market" in the UK.
For the full year, Redrow expects to achieve revenue between GBP1.65 billion and GBP1.70 billion, as well as an underlying pretax profit between GBP180 million and GBP200 million.
It added that, as reported in November, due to the subdued autumn housing market it expects the 2024 results to be towards the lower end of the range.
Chief Executive Matthew Pratt said: "In recent weeks the housing market has shown signs of improvement, with increasing mortgage approvals and reduced mortgage rates with greater competition amongst lenders. This in turn has improved homebuyer confidence and raised the prospects of a return to a more stable sales market."
By Sophie Rose, Alliance News senior reporter
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