The UK housing market needs more consolidation. Does anyone think that? Perhaps not, but it’s what’s happening as Barratt Developments (LSE: BDEV) announced a takeover of Redrow (LSE: RDW) this week. Redrow shares jumped on the news and Barratt shares dropped.
Some might look at this as a once-in-a-decade buying opportunity. Some might want to steer clear. Personally, I think there’s a bigger concern that few are talking about. Let me explain.
The housing sector is in something of a crisis. The shares of housebuilders crashed after Covid. Barratt shares fell by over 60%. Redrow by over 50%. The sector is struggling and housing stocks are trading for discounts not seen in over 10 years.
The general reasons for this are macroeconomic factors. Inflation has pushed building costs up. Interest rates have made mortgages expensive. House prices have fallen too.
This squeeze on margins has led to housebuilders, well, building fewer houses. Barratt completed 28% fewer in the first half. Redrow didn’t mention completions but revenue was down 24%, so I’d assume a drop there too.
The situation
So here’s the situation. Our country is crying out for more homes to be built and a handful of large housebuilders are choosing to build less.
Now throw this deal into the mix. This takeover would consolidate the second-biggest housebuilder and the seventh-biggest. The new company would boast a market value of around £7bn and be the biggest company of its kind in the UK.
Would this be good for home buyers? Probably not. And this is where the Competition and Markets Authority (CMA) enters the scene. The CMA will be scrutinising this acquisition and choosing whether to approve it or not.
Barratt management hopes to get this deal over the line within 18 months. That’s a fair chunk of time for the housing crisis to worsen and even for politicians to wade in. Keir Starmer has already spoken of “getting Britain building again”.
In short, this takeover has plenty of hurdles to clear.
I think the markets agree. Barratt plans to buy Redrow shares at a 27% premium but the shares are only up 13% since the announcement. Investors clearly don’t think it’s a done deal.
A buy?
Let’s say the deal goes through. Would either Barratt shares or Redrow shares be a good buy now?
Well, the benefits are claimed to be £93m recurring efficiency improvements. However, Barratt is paying a £675m premium to acquire Redrow. So, all else being equal, we’re looking at seven years to see any benefit.
On the plus side, Redrow boasts one of the best reputations for premium houses. I see the brand complementing Barratt’s existing products well.
However, there’s far too much uncertainty here on the whole. I’ll sit this one out.
