Yesterday’s bid moves for housebuilder Bovis Homes PLC (LON:BVS) were not unexpected, given the firm’s troubles so far this year which saw its chief executive quit after a surprise profit warning.
But are they more symptomatic of an underlying weakness in the previously resilient sector, and could we expect further consolidation moves away from the Bovis ones, reviving a merger wave seen in the early 2000s?
Bovis shares dropped sharply at the start of this year after the firm issued a profit warning because it failed to complete the number of homes it expected by the end of 2016.
A week later, the firm’s chief executive David Ritchie quit, fuelling speculation that the group could become prey to takeover bids.
Bovis' board said yesterday that it had rejected two indicative offers - worth 783p from Redrow plc (LON:RDW) and 886p from Galliford Try plc (LON:GRFD) – with discussions with Redrow terminated, although talks with Galliford continue.
The moves followed on from a newspaper report at the end of January which said one of its major shareholders had suggested bigger rival Berkeley Group PLC (LON:BKG) should launch a takeover bid for Bovis.
The Sunday Times had said that Schroders Investment Management – which owns around a 6.4% stake in Bovis, its second largest shareholder - had written a letter to Berkeley suggesting an all-share merger with its fellow FTSE 250-listed peer, to diversify its land outside London, though it seems nothing came of the approach.
Can pay, won’t pay …
In a note to clients today, analysts at Liberum Capital said they believe both Redrow and Galliford could both pay up a little more for Bovis, but added that they may choose not to as they “earn better returns from buying open market land.”
The analysts pointed out: “Both Redrow and Galliford Try have cited economies of scale. Merging with Redrow would create a 9,000 unit a year builder, and with Galliford a 7,000 unit a year builder (ex regeneration), meaning that the enlarged entity would be the fourth or fifth biggest builder by volumes.”
However, they added: “The merger wave of the 2000s was driven in part because builders with more scale got better terms for materials, but we wonder if this is still true as manufacturers are more consolidated and tend to have limited spare capacity – making incremental volumes less valuable to them.”
Noughties gone …
Back in the noughties tight planning and excess competition meant that land was scarce and land price inflation was running much faster than house price inflation.
It made sense then to buy large chunks of land through acquisition rather than buy it expensively on the open market.
However, the Liberum analysts noted that the land market is now benign with Steve Morgan, the boss of Redrow “himself observing that the land market is now the best it has been in 40 years”.
Therefore, a fresh wave of consolidation in the sector would probably look to be unlikely, particularly given the uncertainties opened up for the housing market by last June’s Brexit vote, with the moves for Bovis a special case.