Housebuilder Bovis has confirmed it has received proposals from both Redrow and Galliford Try for a takeover of the company. While the Redrow offer has been dismissed, discussions with Galliford Try remain ongoing.
Bovis said in a stock exchange announcement that Redrow offered a share and cash transaction for the company, while Galliford Try made an all-share offer.
It said the board had reviewed the proposals and “concluded that neither reflected the underlying value of the Bovis business and therefore both should be rejected”.
Discussions with Redrow have since been terminated, but continue with Galliford Try.
Redrow
Redrow confirmed in a separate announcement that it made an initial approach to Bovis on 27 February, when the housebuilder’s share price was £7.74.
The proposal was for £1.25 per share and 1.32 new Redrow shares in exchange for each Bovis share, representing a bid of £6.59. Including a final dividend that would still be paid to Bovis shareholders, Redrow said the total value of the proposal would be £8.14 per share.
Bovis informed Redrow on 6 March that this did not merit further discussion. It said: “Redrow subsequently indicated that it was not willing to improve the terms of its proposal and discussions were terminated.”
Redrow said: “Redrow continues to believe the potential combination offers a compelling opportunity to create a combined business with the scale and operational strength to compete more effectively in the growing UK housebuilding market.
“The potential combination would offer a balanced geographic mix of revenue, including a complementary current landbank and forward landbank mix.”
However, Bovis said: “The Redrow proposal was not in the interests of Bovis shareholders as the cash element of the offer would require shareholders to crystallise value at the current Bovis valuation.”
Galliford Try
Bovis said discussions with Galliford Try are ongoing, and Galliford Try has put out its own announcement saying that it has proposed an all-share merger.
Under the deal, it proposed the equity in the combined group would be split 52.25% to Galliford Try shareholders and 47.75% to Bovis shareholders. This would value Bovis at £1.2bn, or 886p per share – a 7% premium to the Bovis share price as of 10 March.
Galliford said it believed its growth and strategy could be enhanced and accelerated through the merger, and that it would “deliver significant synergies through the optimisation of the combined group’s operational structures, sourcing and operating practices”.
A merger with Galliford Try would create a £2.5bn company, combining the sixth and eighth largest housebuilders, by completions, in the UK.
Galliford Try already owns one housebuilder, Linden Homes, which accounts for 85% of its operating profits. Its business also spans the regeneration and construction spheres, with a total market capitalisation of £1.3bn.
Bovis
Bovis has been in the headlines since last year, when it emerged it had received complaints about the quality of its finished homes.
On 28 December 2016, it issued a statement saying: “We have experienced slower than expected build production across the group’s sites during December, resulting in approximately 180 largely built and sold private homes that were expected to complete in 2016 being deferred into early 2017.”
Then on 9 January chief executive David Ritchie, who has been at the helm for eight of his 25 years at Bovis, announced he was stepping down with immediate effect. Earl Sibley, the group’s finance director, took over as his interim replacement.
While the 180 deferred completions was a relatively small number, it hid a larger problem: the housebuilder was receiving complaints about its sales, customer care and quality procedures.
When it released its annual results at the end of February 2017, profit before tax was down by 3%, while basic earnings per share were down by 5%.
In his chairman’s statement, Ian Tyler said the shortfall in performance had two underlying causes. He said: “Firstly, our production processes have not been sufficiently robust to cope with the twin pressures of our growth strategy and the resource shortages across the industry.
“Secondly, we have not designed and resourced our customer service proposition and processes appropriately to deliver a ‘customer-first’ culture.”
In short, it was expanding too quickly and not focused enough on some of its finished products. As a result, the housebuilder said completion volumes in 2017 would be 10-15% lower than in 2016, and it has posted a “one-off £7m customer care provision”.
Behind the deal
Arguably, take-over bids for housebuilders are based on the value of the land they hold. Before the financial crisis, there was a lot of takeover activity because land supply was seriously constrained. But at the moment, the land market is relatively liquid. This means suitors can pick up land they want on the open market at a better price.
But there is a caveat: land on a housebuilder’s books is reported at the value it was bought at. If this was three or four years ago, this could mean considerable land inflation in the intervening period. As a result, the land on its books could be worth more than its trading value implies, and there could be a discount in the deal.
If offers are to increase, this will depend largely on what the bidders think of their ability to turn Bovis around at the top.
The assumption, according to Charlie Campbell, an analyst at Liberum, is that its landbank is good, but it needs to sell houses better. However gross margins could go down if building methodology is changed.
Campbell said: “With Bovis trading close to net asset value, we believe the bids are quite opportunistic. Both managements would be confident of improving returns at Bovis through improving the production process and reducing overheads.
“The overhead to sales ratio is 5.3% at Redrow and 5.3% at Galliford Try, compared to 7.2% at Bovis. We believe Bovis’ landbank should generate gross margins at least consistent with levels generated by the peer group.”
Redrow have already indicated that its offer is final. Chief executive Steve Morgan has done this previously, in 2012, when he offered to take the company private. He did not make another offer. Galliford Try are, however, still in the running.
Answers
Bovis said in today’s announcement that the board was making good progress with plans to recover and improve group profitability and enhance return on capital employed, and the search for a new chief executive was progressing.
Since 23 June, Bovis’s share price has fallen by 13.1% from £10.24 to £8.90.
On 20 February, when it released its annual results, the share price fell by 10.2% to £7.55, from £8.41. Since then, it has risen by 18% to £8.91. Since the start of trading on 13 March, and following the merger and takeover announcements, its share price has risen by 7.5%.
In accordance with rule 2.6 of the takeover code, Galliford Try and Redrow are required, by no later than 5pm on 9 April 2017, to announce a firm intention to make an offer for Bovis in accordance with rule 2.7 of the code or announce that they do not intend to make an offer.
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