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Galliford to Bovis: What the housebuilding sale could mean

Bovis made an improved offer for Galliford Try’s Linden Homes and partnership & regeneration businesses this morning, more than three  months after its first offer was rejected.

Construction News looks at what’s on the table and what it means for each company.

What the deal covers

Bovis, with its 4,000 homes-per-year output, wants to buy Galliford’s two housing businesses that deliver around 6,000 units combined per year.

The new offer raises the value of Galliford’s operations slightly to £1.08bn, up from its £950m offer in May.

Crucially, Bovis is now offering £300m in cash and taking on £100m of Gallfiord Try’s debt, with the remaining £675m paid in Bovis shares to Galliford’s shareholders.

The original deal was a £950m all-share offer from Bovis.

If the deal goes through, Galliford Try will be left as a listed construction business with some PPP investments.

What it means for Galliford Try

Galliford Try will shrink from a group generating revenue of around £3bn per year to a construction business turning over around £1.7bn per annum.

For this new streamlined and more focused business, the most obvious benefit will be to its balance sheet.

“I think there are better times to expand. The boom times for housebuilder profit seem to be over”

David Madden, CMC Markets

Galliford Try reported average net debt of £187m in a July trading update for its financial year ending 30 June 2019.

With Bovis offering to take £100m of Galliford Try’s debt and also give it £300m in cash, the company will have a much stronger net cash position.

This resolves the main sticking point from the original deal from May, which did not include any new capital being pumped into Galliford Try.

Applied Value analyst Stephen Rawlinson said the capital injection offered by the new deal is essential, as Galliford Try has previously used its housing assets to help secure bonding and insurance for its construction projects. The new injection compensated for this loss.

What it will mean for Bovis

The big benefit for Bovis is scale.

With Galliford Try’s Linden Homes and partnership & regeneration businesses Bovis will go from a company delivering 4,000 units per year to one delivering around 10,000.

Bovis (year ending 31 Dec 18) Linden Homes and Partnerships & Regeneration (year ending 30 Jun 18)
Revenue £1.06bn £1.41bn
Operating Profit £174m £208m
Pre-tax Profit £168m £156m
Op Margin 16.4% 14.8%
Pt Margin 15.8% 11.1%
Houses built 3,759 6,193

This will put it on a par with the UK’s fourth-largest builder, Bellway, which delivers around 10,000 per year, and significantly ahead of Redrow, which builds around 6,000 per year, but is growing fast.

Mr Rawlinson says it will have more power when it comes to procurement and could see better returns from its regional operations.

“Some of the Bovis regional operations are probably undersized,” Mr Rawlinson said. “Ideally you want to be building 250-300 houses per annum per region.”

Galliford Try’s housing output will help it reach those levels.

Potential stumbling blocks 

The biggest obstacle to the deal is the rights issue Bovis intends to launch to help raise the £300m cash.

“To launch new equity in the current market, you’ve got to have a pretty compelling case, and that’s going be the biggest stumbling block,” Mr Rawlinson said.

As a company it is not in desperate need of cash, as Kier was when it launched its own rights issue last December.

CMC Markets analyst David Madden said: “I don’t think investors will be running away from this [rights issue].”

Risks

As with any M&A there is a major question over how the integration will be managed.

“There are risks at the managerial level: have Bovis got the infrastructure to manage 10,000 units?” Mr Rawlinson asked.

Mr Madden was also sceptical about the timing of the deal.

“Some of the Bovis regional operations are probably undersized. Ideally you want to be building 250-300 houses per annum per region”

Stephen Rawlinson, Applied Value

“I think there are better times to expand,” he said. “The boom times for housebuilder profit seem to be over.”

Bovis and its peers are still doing well, he said, but profit is not heading up as rapidly. With the ongoing uncertainty in the market, there is a chance that demand will slip and profit will come back down.

If Bovis are buying as the market turns, it could come back to bite them, he added.

“People always remember who was the last person to stock up before the party ended,” Mr Madden said, warning that speculators could use the deal as motivation to short sell the stock further down the line.

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