News of a takeover deal from Barratt Developments (LSE:BDEV) has caused the Redrow (LSE:RDW) share price to jump 12.5%. But could there still be an opportunity for investors?
The purchase deal involves Barratt paying £2.5bn in stock. But, as I write this, Redrow’s market-cap is £2.25bn – still 10% short of this level.
Risks
This makes it natural to think there’s still a potential short-term gain of 10% for Redrow shareholders if the deal goes through. But there are a few reasons why Foolish investors prefer long-term thinking to avoid opportunities like this.
One is there’s a small chance things might fall through. If so, the Redrow share price would likely fall and anyone who bought the stock just for the takeover would have no reason to keep owning it.
There’s a much bigger issue though. The deal is being financed using stock rather than cash – for each of their current shares, Redrow shareholders stand to receive 1.44 Barratt shares.
With Barratt’s share price now at £4.90, 1.44 shares has a market value of £7.06. And with the Redrow share price having reached £6.82, the difference isn’t 10% – it’s around 3%.
Investors should therefore be careful before trying to take advantage of a potential opportunity here. I just don’t think the numbers make sense given the recent stock movements.
Rewards
Buying Redrow shares might be a good idea for another reason though. According to Barratt’s estimates, the numbers on the transaction look quite attractive.
Within three years, the company believes it can achieve £90m a year of cost savings. And around £81m of those savings should be achieved within the first year.
The forecast costs of the deal are in the region of £73m. So if Barratt has its numbers correct, the move should increase pre-tax earnings in less than a year with big gains to come further on.
The combined company also looks like it should be in a good position when things look up for UK housing. Over £7bn in revenues and more than 92,000 plots in its pipeline make it a big operator.
With construction in a cyclical downturn, I think it’s a good time to be getting ready for when things look up. And the numbers Barratt suggests make it look like there’s a margin of safety here.
Long-term investing
I’m not interested in buying Redrow shares for the potential quick opportunity at the moment. But I do think the combined entity looks interesting from a long-term investment perspective.
The construction industry is clearly weak at the moment – as demonstrated by Barratt’s recent dividend cut. But times like these can present some of the best opportunities.
To me, the move to acquire Redrow looks like a good one. And it’s got me thinking seriously about buying shares in the combined company for potential long-term returns.
