Barratt Developments to buy Redrow as results reflect industry pain
Paying up for rival Redrow is a strong statement of intent from the housebuilder, but the initial reaction to the takeover and half-year results has been poor. ii's head of markets has the details.
7th February 2024 08:05
by Richard Hunter from interactive investor
The results have been eclipsed by the announcement that Barratt Developments (LSE:BDEV) has offered to buy FTSE250 rival Redrow (LSE:RDW) in an all-share offer which values the latter at £2.52 billion.
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 £7.45 billion.
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Subject to shareholder and regulatory approvals, the aim is to complete the deal in the second half of this year, with Redrow becoming the premium brand in the enlarged portfolio.
Annual cost synergies of £90 million are expected by year three, with associated costs of the acquisition in the interim of £73 million. A combined land pipeline of 92,345 plots gives the new combined entity significant firepower as and when economic constraints abate, while a combined net cash position of £874 million also allows room for further expansion as and when the opportunities arise. Complementary geographical footprints add a further intriguing dimension to the deal.
In the meantime, 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 £62 million in this period.
As such, the numbers for Barratt show these signs of strain. Revenues for the period fell by 33.5%, while adjusted pre-tax profit plummeted by 70% to £157 million. The adjusted operating margin also fell foul of the current environment, dropping from 18.4% to 8.4%, while net cash reduced from £969 million to £753 million, although the revised figure still provides an adequate buffer given the economic circumstances.
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More positively, Barratt has kept a firm hand on the tiller in terms of the factors within its control through a combination of controlling build activity, managing costs and an ongoing and highly selective attitude to new land buying.
Expectations for lower interest rates in the shorter term and the availability of more competitive mortgage rates have resulted in an uptick since the start of the calendar year, both in terms of buyer sentiment and also reservation rates.
Moderating build cost inflation will also ease some of the pressure on margins, while the forward order book of £2.3 billion is 74% completed, providing some visibility of earnings. The group has also taken the prudent step of shaving its dividend payment once more, but even after the cut a projected yield of 5.3% is attractive in the current environment.
The crucial Spring selling season now becomes the acid test for any potential turnaround in the fortunes of the sector as a whole.
Prior to today’s announcements, Barratt shares had seen a resilient performance more recently, with the shares having added 14% over the last year, as compared to a dip of 2.3% for the wider FTSE100 index.
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However, this cannot mask a longer-term overhang for the sector, with the price having dropped by 25% over the last three years. The housebuilders are by nature part of a highly cyclical industry and are generally better prepared to face the headwinds than in previous turns in the economic cycle.
But the more recent downgrade of the shares to a 'hold' in terms of the market consensus implies that sustained evidence of a recovery remains elusive and that some investors are content to sit on the sidelines for now. That being said, the Redrow acquisition is a strong statement of intent which will impel some investors to sit up and take notice once more.
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