Shares in Barratt Developments reversed sharply on Wednesday as the FTSE 100 housebuilder announced a monster tie-up with industry peer Redrow.
At 492p per share, Barratt’s share price was last dealing 7.2% lower on the day.
The company announced a £2.5bn takeover of FTSE 250-quoted Redrow in a deal that will give the latter’s shareholders a 32.8% stake of the combined group, with Barratt shareholders holding the remaining 67.2%.
Barratt said that the merger — which will go by the moniker Barratt Redrow — will “bring together two companies with highly complementary geographic footprints and three highly respected brands” and “accelerate the delivery of much-needed homes across the UK.”
The businesses build properties under the Barratt Homes, David Wilson Homes and Redrow banners. They generated combined revenues of £7.4 billion in 2023 and recorded a total of 22,642 completions.
“Stronger Together”
The deal — which has also been recommended by the Redrow board — is expected to generate £90 million worth of annual savings for the combined entity by the end of the third year.
Analyst Susannah Streeter of Hargreaves Lansdown commented that both businesses “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.”
She added that “with a shortage of homes in great swathes of the UK being pushed up politicians’ priority lists, there is considerable long-term opportunity for a beefed up housebuilder.”
Tough Conditions
On Wednesday Barratt also released trading numbers for the six months to December which reflected ongoing challenges in the housing industry.
Revenues at the FTSE 100 firm slumped 33.5% over the period, to £1.9 billion, as the number of completions fell 28.5% year on year to 6,171 homes.
Adjusted gross margins, meanwhile, dropped to 16% from 23.3% due to weaker house prices and higher build cost inflation. Lower margins and weaker sales meant that adjusted pre-tax profits reversed 69.9%, to £157.1 million.
Net cash dropped by 22.3% during the period but remained at a robust £753.4 million as of December.
However, Barratt slashed the interim dividend to 4.4p per share from 10.2p a year earlier due to lower profits and higher corporation tax.
Green Shoots
Barratt chief executive David Thomas said that “underlying demand for our homes is strong” despite the tough economic backdrop.
He noted that “since the start of January, we have seen early signs of improvement in both reservation rates and buyer sentiment, helped by expectations of lower interest rates and the introduction of more competitive mortgage rates.”
As a consequence of this pickup, Barratt now expects to deliver between 13,500 and 14,000 completions in the current financial year, down from the 17,206 in financial 2023.
Thomas added that “we have been rigorous in carefully controlling our build activity, managing our costs, being highly selective in land buying, and driving revenue,” which in turn has helped the business “maintain the strength of our balance sheet despite lower levels of profitability.”
Royston Wild owns shares in Barratt Developments.