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Bovis Homes takeover bids from Galliford Try and Redrow seen as opportunistic

Given its recent troubles, analysts believe Bovis Homes is unlikely to receive bids from other housebuilders after rejecting offers from Galliford Try and Redrow

A takeover of Bovis Homes presents a risk for potential bidders, says Shore Capital

Two takeover approaches for Bovis Homes Group plc (LON:BVS) come amid a host of struggles at the housebuilder, including a profit warning, criticism over the quality of its new builds and the departure of chief executive David Ritchie.

Bovis Homes today said it rejected bids from Galliford Try (LON:GFRDF) and Redrow (LON:RDW) as it believed they undervalued the business

Redrow said its offer was worth the equivalent of 814p per Bovis share out of cash, Redrow shares and dividend payments.

Galliford Try proposed an all-share offer merger at a 7% premium on Bovis’ share price at close on Friday, offering 886p per share.

The proposed takeovers follow January’s announcement that Ritchie was stepping down in the wake of a profit warning. Bovis said late last year that 2016 profits were likely to miss market expectations due to delays to the completion of about 180 homes.

Bovis also came under fire last month after saying it was paying £7mln to repair poorly built new homes. Discontent customers had formed a Facebook group accusing Bovis of pressuring them to move into incomplete homes in order to hit sales targets.

The company apologised to customers for the poor quality of their homes but refused to state how many homes needed repair work.

Bovis shares have also underperformed the rest of the sector since last June’s Brexit vote.

Galliford Try and Redrow bids seen as opportunistic..

UBS said following such operational challenges at Bovis and the departure of its chief executive, it saw the approaches from Galliford Try and Redrow as “opportunistic”.

“In theory, we believe consolidation amongst two mid-cap homebuilders makes sense in order to gain scale and achieve cost efficiencies,” according to UBS analysts Miguel Borrega and Gregor Kuglitsch.

“However attractive returns achievable on land limits options for cash transactions, in our view.”

The analysts said bids from other housebuilders were unlikely.

Bovis Homes takeover a risk for potential bidders…

Equally, Shore Capital does not see bids from other large rivals as a takeover of Bovis would be potentially problematic given its recent troubles.

In fact ShoreCap said it thinks any business looking to buy Bovis would be taking a gamble.

“Bovis’ position has been exposed as being weak since the first tiny hints of trading weakness at the time of the November trading statement, through a profit warning for 2016 in December, the resignation of the CEO in February and finally the decision to throttle the business back for at least 2017 and review strategy in February that had led to forecasts being cut by two-thirds,” said ShoreCap analyst Robin Hardy.

“It is far from clear whether we yet know the full extent of what is wrong at Bovis, so unless any bidder would be able to see very open books, buying Bovis would be a fundamental risk.”

ShoreCap said unless a merger of virtual equals can demonstrate it will deliver significant savings, there would be no added value for shareholders.

Redrow vs. Galliford Try…

Out of the two bids, ShoreCap said a merger with Redrow "makes more sense" for Bovis shareholders. However, the broker is less convinced it would be a good move for Redrow investors as Bovis is likely to be dilutive of earnings quality and quantity as it struggles to cover its cost of capital this year.

“It is harder for us to be able to comment on whether this would be a good deal for Galliford Try as we do not research this business but the same core issues of risk and reward would equally present but with the indication that Galliford Try is willing to pay 886p naturally makes the inherent risk greater.”

Bovis Homes said it was continuing talks with Galliford Try but discussions with Redrow were over after it indicated it was not willing to improve the terms of its proposal.

However, Redrow indicated that wasn’t ready to give up. In a statement, the group said it “continues to believe the potential combination offers a compelling opportunity to create a combined business with the scale and operational strength to compete more effectively in the growing UK housebuilding market”.

Shares in Bovis gained 8.15% in morning trading. 

Quick facts: Vistry Group PLC

Price: 1380 GBX

Market: LSE
Market Cap: £3.01 billion

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