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Housebuilders Bovis, Redrow & Galliford three in a bed shock photo emerges

By Tom Winnifrith | Monday 13 March 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

The last time there was a mega merger in the housebuilding sector was 2007. Can you remember what happened next? Exactly. And thus today Bovis (BVS) announced that it had received bid approaches from both Redrow (RDW) and Galiford Try (GFRD). It has rejected both.

The Galliford offer is - nominally - worth 886p but since it is all-share proposal it is not exactly the same as cash on the table. The Redrow offer was 814p of which £1.25 came in cash from Redrow, 30p was a dividend Bovis shareholders would have got anyway and the rest was Redrow paper.

What does this tell us? Are there really massive synergies gained by merging two housebuilders? In the greater scheme of things the answer is no. Yes you can fire 1 FD, three quarters of his accounts team, axe one sety of listing and other PLC costs but for builders of the size of Bovis that is not a massive saving in the greater scheme of things. None the less its shares have jumped by 62p to 890p at the time of writing. Clearly folks are pricing in higher offers and, possibly, a bid battle.

What do the moves tell us about the sector? You and I both know that UK interest rates will go up this year and also that the UK consumer is over-borrowed and under-saved. Even a marginal tightening of monetary policy could squeeze a number of mortgage holders very badly indeed.

At present the stockmarket is expecting most builders to deliver a modest increase in sales this year with house prices at least maintaining their real terms value, i.e. rising at least in line with inflation. My belief is that the market is overly optimistic on both counts. And thus while Redrow, for instance, trade on an historic PE of 9.9 that could well be a 2017 or 2018 PE of a magnitude of that as operational gearing kicks in in a negative way.

To me it is telling that Redrow - which at the half year stage was just 5% geared - would rather buy a rival than build up its land bank/accelerate the building of new homes. I think we all know the reasons why it is behaving in that way;.

Of course shares in Bovis may well head higher but would I want to gamble on a bid actually arriving? And then would I want my winnings to be largely in paper in another housebuilder? I think not. Learn the lesson of 2007, this sort of thing is top of the market activity when CEOs can think of no other way of spending shareholder's cash than buying other PLCs. If i was invested in the sector I'd view this as a chance to bail.

Meanwhile housebuilding execs from Redrow, Galliford and Bovis are pictured below as they hunker down to discuss the next move. The Bovis chap is in the middle and here he is responding to Redrow's proposal.


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