The outcomes have been overshadowed by the declaration that Barratt (LON:) has proposed to acquire competitor Redrow (LON:) in an all-share offer valued at £2.52 billion for the latter.
The maneuver represents a significant shift for the industry, not only reflecting the difficulties that housebuilders have recently encountered against the economic backdrop, but also a move to strengthen the capabilities of two major participants, with the new “Barratt Redrow” entity generating combined revenues of £7.45 billion. Pending shareholder and regulatory approvals, the objective is to finalize the transaction in the second half of this year, with Redrow assuming the role of premium brand in the expanded portfolio.
Annual cost synergies of £90 million are anticipated by year three, accompanied by acquisition costs of £73 million in the interim. A consolidated land pipeline of 92345 plots provides the combined entity with significant potential once economic constraints ease, while a combined net cash position of £874 million also allows room for further expansion as and when opportunities arise. Complementary geographical footprints add an additional intriguing aspect to the agreement.
In the meantime, the rationale for the agreement remains in sharp focus, given the unfavorable conditions confronting the homebuilding industry. Constricted mortgage affordability and availability have led to diminishing customer demand, while broader concerns over general economic growth, consumer confidence, and spending have further complicated the scenario. Simultaneously, the discontinuation of the Help to Buy scheme has eliminated a crucial support for first-time buyers, and legacy costs for remedial building work continue to exert a significant toll, amounting to £62 million in this period.
Consequently, Barratt’s figures depict clear signs of strain. Revenues for the period experienced a 33.5% decline, while the adjusted pre-tax profit plunged by 70% to £157 million. The adjusted operating margin also suffered in the prevailing environment, decreasing from 18.4% to 8.4%, and net cash decreased from £969 million to £753 million, although the revised figure still offers a sufficient buffer given the economic circumstances.
On a more positive note, Barratt has displayed firm control over factors within its purview by regulating construction activity, managing costs, and adopting an ongoing and highly selective approach to new land acquisition. Expectations for lower interest rates in the short term and the availability of more competitive mortgage rates have led to an improvement since the beginning of the year, both in terms of buyer sentiment and reservation rates.
The moderation of construction cost inflation will also alleviate 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 prudently reduced its dividend payment once more, but even after the reduction, a projected yield of 5.3% is appealing in the current environment. The pivotal Spring selling season now becomes the litmus test for any potential reversal of fortunes for the sector as a whole.
Prior to today’s announcements, Barratt shares had demonstrated resilient performance recently, with the shares gaining 14% over the past year, compared to a decline of 2.3% for the broader market. Nonetheless, this cannot disguise a longer-term overhang for the sector, with the price having dropped by 25% over the last three years. Housebuilders are inherently part of a highly cyclical industry and are generally better equipped to face headwinds than during previous economic cycles. However, the 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 remain on the sidelines for now. Nevertheless, the acquisition of Redrow is a robust declaration of intent that will compel some investors to once again take notice.