- £2.52bn deal at 7.2 per cent premium
- All-share deal will see 67/33 split in ownership of enlarged company
Barratt Developments (BDEV) will buy rival Redrow (RDW) in an all-share takeover to create the UK's largest housebuilder.
The £2.52bn deal, done during a stagnant housing market caused by high interest rates, represents a 7.2 per cent premium to Redrow's closing price on Tuesday of 600p. Barratt shareholders would hold 67.2 per cent of the enlarged group while Redrow's shareholders would 32.8 per cent. Redrow's shares surged 12 per cent as Barratt's sank 8 per cent following the deal announcement. Shareholders will vote on the arrangement at an upcoming meeting.
The boards said their combined revenue was £7.5bn last year with 22,642 homes completed, adding that the merged group would have net cash of £874mn and a land bank of 92,345 homes. The brands will remain separate under the deal. Redrow founder Steve Morgan has backed the deal, pledging to vote his 16 per cent stake in favour.
The boards said the deal "brings together complementary offerings to create an exceptional UK homebuilder in terms of quality, service and sustainability that builds high-quality, sustainable homes and communities for customers across the UK". Barratt's board said the deal would deliver "pre-tax cost synergies of at least £90mn on an annual run-rate basis".
The deal comes as housebuilders across the UK struggle to increase their profits after a difficult 18 months for the sector, which has seen demand tumble on higher mortgage rates. There is some respite on the way in terms of house prices, however, as mortgage rates come down. The latest Halifax house price survey reported a 1.2 per cent gain in January, and a 2.5 per cent increase in prices compared with a year ago.
Long-term factors are keeping a lid on supply, supporting prices but also limiting housebuilder output.
Housebuilders have blamed the planning system for weak growth, with Barratt claiming in its results that "lack of developable land due to delays in planning approval, failure of a clear and consistent government policy or insufficient consented land and strategic land options at appropriate cost and quality" could hurt its sales this year. Barratt saw its operating margin slip from 18.4 per cent to 8.4 per cent in the six months to 31 December. Adjusted pre-tax profit was down 70 per cent, to £95mn, and its interim payout was cut to 4.4p from 10.2p last year.
Aynsley Lammin, analyst at Investec, said a combined Redrow and Barratt would weather these difficulties better.
"The deal looks very sensible given the challenging planning and land backdrop, particularly assuming that sales rates and the profit outlook gradually improve from here," he said. "The all-share nature of the deal is astute, retaining a robust balance sheet."
He added that the implied net asset value multiple of 19 per cent for the 2024 calendar year "looks attractive, assuming margins and returns for the sector recover to significantly higher levels over the medium term. Barratt’s management team is well respected, and will be expected to execute this deal successfully."
The Competition and Markets Authority (CMA) will have to sign off on the deal as well as shareholders. The regulator has already been looking into the housebuilders buying up land, especially in a "small number of areas where large amounts of developable land are controlled by a small number of housebuilders". In its response to the review, Barratt said there was no evidence of developers drip-feeding houses into the market and pushing up local pricing.
