Shares in Galliford Try (LSE: GFRD) perked up 8% in morning trading Tuesday. This was down to confirmation, after press speculation, of a failed bid from Bovis Homes (LSE: BVS) for the firm’s Linden Homes and Partnerships & Regeneration businesses.
Bovis confirmed it had offered “£950m together with the assumption of Galliford Try’s 10-year debt private placement of £100m,” paid in new Bovis shares. The firm stressed that there’s no overall merger on the cards, just the attempted acquisition of those specific businesses.
On having its overtures rejected, the suitor told us that “Bovis Homes and Galliford Try are no longer in discussions.”
Undervaluation
Galliford Try, for its part, said of the proposal that “it believes it does not fully value the Linden Homes and Partnerships & Regeneration divisions and is not in the interests of all shareholders.”
The Bovis share price is up just 1% as I write, so what do I make of this ‘nothing has actually happened’ news? I think it says something positive about both companies.
Galliford Try, which is big in industrial and public sector construction as well as having its housebuilding arm, had seen its share price fall by more than 50% over two years before the past month’s uptick. There has been some disappointing progress in a couple of the firm’s big projects, and this year’s profit is subsequently expected to come in lower than analysts’ previous expectations.
The company is also cutting its employee count and embarking on cost-saving measures, and it always makes me a bit twitchy when I hear such things from companies paying big dividends. Forecasts suggest yields of more than 10% from Galliford for this year and next, and to my mind that doesn’t square with cost-cutting.
Debt down
But the firm did record a big drop in net debt at the end of the first half, to £40.1m, and at the same time it cut the interim dividend by 18%. I’d actually like to see a further dividend cut when finals come around, and a bigger focus on the balance sheet.
But Galliford is clearly not so troubled that it needs to offload profitable businesses, and I’m buoyed by the firm’s apparent confidence in its prospects.
For its part, the buyout attempt from Bovis shows that company is having none of this talk of a depressed housing market or of hard times for the UK’s housebuilders.
Housebuilding confidence
In fact, when you see a sector as being out of fashion without finding any rational reason for it, I reckon that’s the time to buy. It’s what I did when I bought some Persimmon shares towards the end of last year, and I’m pleased that Bovis sees other companies’ housebuilding assets as good-value acquisition targets.
I do think, however, that Bovis’s approach was a little opportunistic, and I can’t help wondering how a cash bid might have turned out. Would Galliford Try’s board have been more tempted by coin of the realm than by Bovis paper in these harder economic times?
On valuation terms, I see Galliford Try as down but certainly not out, and I see Bovis Homes as still undervalued. I reckon they’re both strong buy candidates.
