Bovis will offer Galliford shareholders 0.574 shares worth 604p apiece on the previous closing price and another £400mln net cash, of which £300mln would be paid in cash and another £100mln of debt transferred from Galliford to Bovis.
History of rejections
Back in May, Galliford rejected an all-share approach from Bovis where the terms were not disclosed but was thought to be around £950mln-£1.05bn. In 2017, Bovis rejected offers from Galliford and Redrow.
The new offer has been disclosed and values the combined Linden Homes residential building arm and the Partnerships & Regeneration division at a total of £1.075bn or 968p per share, compared to Galliford’s 615p closing price, with Bovis shares closing overnight at 1,059p.
Under the current terms Galliford’s pension scheme will be transferred to Bovis, which would also carry out a 9.99% share placing to raise cash for the deal.
Talks are "at an early stage", the pair said, and remain subject to shareholder approval and due diligence, among other things.
If it goes ahead as planned, Galliford shareholders will be left with a combination of around £150mln net cash and a construction business capable of making up to £30mln of underlying profit a year.
The deal would, said Bovis, enable it to "compete more effectively" in the UK housebuilding market, as well as generating "significant synergies" from operational and procurement savings.
Bovis is especially interested in getting a bigger footprint in the higher-growth social housing partnerships and regeneration markets, while Linden would also bring a complementary geographical footprint and strategic land bank.
Post-transaction, Galliford Try, which saw its shares lose around a third of their value when it warned on profits in April, would be left to become "a well-capitalised standalone construction-focused group, benefitting from the recent operational restructuring which refocused the business to deliver improved future performance".
Galliford shares were up 14% to 703.5p on Tuesday morning, while Bovis, which also announced interim results including improved operating margins and an interim dividend of 20.5p, was down 5% to 1,004p.
"Logic is sound"
Wondering why Galliford seemed more amenable to an offer only slightly higher than the one it rejected in May, market analyst Neil Wilson at Markets.com suggested that the £300mln cash was the key sweetener.
Balance sheet concerns are heightened for the construction sector in the wake of the collapses of Carillion and Kier.
“That new cash element will be a welcome injection for the newly reorganised Galliford construction division, which has been struggling after problems with the Aberdeen bypass and the Queensferry crossing,” said Wilson, also noting that for Bovis boss Greg Fitzgerald it would mark a coming home after 30 odd years at Galliford.
“And just concentrating on the housebuilding and regeneration divisions, rather than absorbing the whole of Galliford Try, makes this an easier to swallow meal,” Mould added.
Sophie Lund-Yates, analyst at Hargreaves Lansdown said the logic behind the deal is "sound enough", with plans to realise cost savings and propel growth, but the £1.08bn price tag means there’s a lot at stake.
"Exposure to the new business and its land bank may well be good news for Bovis, but some may wonder if now’s the right time to be doing such heavy lifting, given the uncertain economic backdrop," she said.
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