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Galliford Try PLC doesn’t make sense without its houses

Almost four months after it first made overtures to Galliford Try and its housing interests, Bovis and the contractor have agreed “high-level” terms for the acquisition of Linden Homes and Galliford’s partnership & regeneration business.

There’s a lot to like about the deal. Bovis will more than double in size and presumably capture greater economies of scale, assuming it can manage the integration.

Galliford Try will live on as a business very clearly focused on construction, but much healthier thanks to the deal improving its balance sheet to the tune of £400m.

And Galliford Try’s shareholders get a load of Bovis shares as part of the deal.

So good news all round then.

Assuming this all goes through, and chances are it will, it is worth considering whether Galliford Try construction remaining a listed PLC makes sense.

This year the overall group paid out £79.9m in dividends, which it was able to do because the housing arms were profitable.

If it had been a PLC without these interests, then shareholders would be facing their third year without a dividend due to the losses the construction division has faced.

Thankfully for the firm, the AWPR and Queensferry Crossing have been largely put to bed, and the company insists its order book carries much less risk now and the business is back on course.

With that in mind let’s take a look at what the construction only business could deliver next year.

Let’s take the underlying margin of 1.1 per cent, which the company presented in its construction business this morning, as a minimum of what it will achieve.

Let’s also assume its revenue is around £1.4bn, as the division’s boss Bill Hocking told me he expected it to be.

That would mean an operating profit of £15.4m. Add in the financing costs, which were £19m this year and likely to be substantial next year as Bovis is only taking £100m of the debt, and we’re left with minimal pre-tax profit.

Get to the post-tax number and it’s hard to see much, if anything, left over for shareholders. Those £80m distributions look to be a thing of the past.

Even if we’re generous and assume the construction business can get 3 per cent, that’s still only £42m profit on £1.4bn turnover. And again, once you account for finance costs, that dwindles and the retained earnings for shareholders is minimal.

The only way Galliford Try could get close to delivering the kind of returns shareholders have enjoyed up to now is if it can double in size to a £3bn company. After more or less overhauling its construction business, I don’t think there will be an appetite for gung-ho growth.

With reduced dividends and no big ambitions for growth (which is a good thing), it’s not a particularly exciting investment case.

It will, however, be a profitable company and, as management has been at pains to point out, a well-capitalised one. This could make it a prime target for takeover by a private equity outfit, or even a foreign contractor looking to break into the UK.

And, as we’ve outlined before, being private has considerable benefits for a contractor, especially when problem projects arise.

I also wonder what will happen to Mr Hocking if the housing sale goes through. He is the chief executive of the construction and investment business, which is all that will be left after the housing divisions are sold off.

What purpose would his boss, group CEO Graham Prothero, serve then? After six years at Galliford, the housing business sold and the construction business on a stable footing, Mr Prothero could decide it’s time to move on.

A promotion could be on the way for Mr Hocking then, which would perhaps be just rewards for de-risking the construction business and moving it away from ruinous jobs like the AWPR.

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