How failure to build forced construction giants to merge

Barratt and Redrow say £2.5bn tie-up will prepare them for a pick-up in the housing market, reports Matt Oliver

‘It makes our land pipeline more efficient and we deliver more homes’ ‘By triple branding, we will increase the output from the sites’

After unveiling plans to create what will easily be Britain’s biggest housebuilder, the bosses of Barratt and Redrow have been at pains to argue that their £2.5bn merger is unrelated to market turmoil.

“To me, it’s absolutely not something of the moment,” insists David Thomas, Barratt’s chief executive. “I believe that together, we will be a stronger business.” The deal will bring Redrow’s more premium housing brand under the same roof as first-time-buyer-focused Barratt and David Wilson Homes, its more upmarket business.

Having the differently priced brands on the same developments will offer more choice to consumers, they say, ultimately helping to shift more homes. None the less, both the timing of the deal and the backdrop look somewhat telling. Following a boom in building and profits during the 2010s, the two developers and their peers are now battling a brutal downturn.

With high interest rates pushing up the cost of mortgages, many buyers have been priced out. Meanwhile, the industry has found itself at loggerheads with the Government over planning rules that critics say are throttling construction rates.

Underlining the malaise, Barratt’s own figures yesterday showed a grisly 29pc drop in the number of homes sold and an 81pc fall in profits during the six months to the end of December.

And Redrow is only faring a little better. Completions at the smaller developer over the same period plunged by a quarter, while profits were more than cut in half.

Of course, neither Barratt nor Redrow are in financial trouble. But the all-share nature of their merger belies a note of caution behind the scenes. Compare that with Barratt’s last big deal – the £2.2bn takeover of David Wilson Homes, on the eve of the 2008 financial crisis – which was a debt-fuelled one.

By uniting, the two builders are to create a new giant with a fortified balance sheet and supersized land bank. “I think it’s fair to say we believe this combination is an opportunity to meet the current challenges faced by the house-building sector, and together will benefit from what is going to be a robust balance sheet,” says Matthew Pratt, Redrow’s boss. Or, as another housing industry source puts it: “There’s safety in numbers.”

Housebuilders had been enjoying something of a renaissance before the coronavirus pandemic, as rock-bottom interest rates and Help to Buy loans from the Government fuelled huge demand for new homes.

Changes to the planning system under David Cameron’s administration, which punished councils that didn’t set aside enough land for new homes, also ensured more developments were approved at appeal.

As the success of these policies gathered pace, the number of homes added in England eventually peaked at 248,590 in the year to March 2020 – although this was still short of the Government’s declared target of 300,000 per year.

That was also good for builder profits, with Barratt making £909m in 2019 and rival Persimmon earning profits in excess of £1bn.

Yet a backlash in the shires since then has prompted Conservative ministers to strengthen planning rules, with Michael Gove, the Housing Secretary, recently scrapping a requirement for councils to stick to the targets given to them by Whitehall.

At the same time, the Covid pandemic temporarily paralysed housebuilders, while the subsequent market downturn that has accompanied rising interest rates sent buyers running for the hills.

In the wake of this turmoil, the number of homes completed in the 2022-23 financial year has dipped to 234,400, 6pc below its previous peak. Industry body the Home Builders Federation has warned the figure could soon drop below 200,000 per year, based on the number of homes being started. And the malaise has hit the balance sheets of builders hard. Whereas Barratt handed over 8,626 homes to consumers in the six months to Dec 31 in 2022, that figure tumbled to 6,171 during the same period last year – sending the company’s profits plunging from £502m to £95m.

At the same time, Redrow said completions fell from 2,485 to 1,894. Profits fell from £198m to £84m.

Combining forces will allow the two companies to bolster their market positions, their chief executives say, while potentially unlocking more sites for development as well.

Under the deal, the brands will retain their separate identities and architectural styles, with Pratt, who has held his post since 2019, continuing as Redrow’s boss and taking a seat on Barratt’s board. However, they will also be able to collaborate on the same developments, providing opportunities to attract a wider range of buyers. For example, on a typical 200-home site, Barratt might sell 50 homes a year and its sister brand David Wilson might sell 40. And bringing in Redrow will theoretically boost the number further.

“By triple branding, we will unquestionably increase the output from the sites,” says Thomas.

“It makes our land pipeline more efficient and we deliver more homes, so it’s good for our stakeholders and good for housing [supply]. We do see that as absolutely central to what we’re doing.”

Analysts praised the combination as a canny one. “The deal looks very sensible given the challenging planning and land backdrop, particularly assuming that sales rates and the profit outlook gradually improves from here,” wrote Aynsley Lammin and Lewis Roxburgh at Investec. “The all-share nature of the deal is astute, retaining a robust balance sheet.”

Yet the reactions from the investors in each company were diametrically opposite. While Redrow shares surged 13.6pc higher, Barratt’s stock dipped by 5.5pc. That is perhaps because Redrow’s investors, including the company’s founder, Steve Morgan, are currently poised to make a pretty penny on paper. Under the terms of the merger, Redrow’s shareholders will receive 1.44 Barratt shares for each Redrow one, leaving them with about 32.8pc of Barratt afterwards.

That implies a premium of 27pc on Redrow’s share price before the tie-up was revealed.

Morgan, who still owns 16pc of his company and will see his paper fortune increase from £338m to £404m, has already declared his backing for the deal, which he said will create “a standout home builder for the future”.

With Barratt and Redrow pointing to signs the market is finally looking up, that is a future bosses surely hope will be brighter than of late.