Barratt Developments agreed to a £2.5 billion deal with Redrow. This will allow it to cement its position as one of the largest housebuilders in the country while also reducing costs by approximately £90 million.
The tie-up, if approved by the shareholders, would create a new developer that could build 23,000 homes in total across the country and generate revenue of £7.5bn, based on last year’s figures. Barratt was the only developer to build more than 17,000 homes.
Both companies are convinced that joining forces will help them “resilience throughout the cycle” after a difficult 18-month period, when higher rates on mortgages caused builders to struggle with selling their homes.
Analysts at City suggested that Barratt’s move was an indication that it was preparing to take advantage of a pickup in the market. They also noted that both companies have seen a rise in sales. However, they warned that the year is still young.
Barratt and Redrow expect to be able reduce their cost base annually by £90m within three years after merging. The majority of this savings will come from better deals with suppliers due to their increased scale. They also plan on closing offices that overlap their networks and eliminating duplicate costs.
As much as 10 percent of the total workforce could be at risk, which translates to almost 900 jobs.
The head of another developer wasn’t convinced by the cost-savings, saying that they appeared “very high”.
Barratt believes that having three brands — Barratt Homes David Wilson Homes and Redrow – under one roof will benefit them. Redrow is a more “premium brand” that builds larger and more expensive houses. Barratt believes that some sites will benefit from a premium product, while Redrow has some sites that are more suited to Barratt and David Wilson Homes.
Anthony Codling, a RBC investment bank analyst, said that the deal made “strategic sense” as it would allow Barratt, in particular, to increase its land bank especially in southeast England “a area [in] which Redrow specialises”.
Redrow investors have been informed that their dividends will increase “significantly”. Redrow’s stock market value is 27 percent higher than the all-paper transaction. Redrow shareholders receive 1,44 Barratt shares per Redrow share.
Redrow shares closed at 688 1/2p after gaining 88 1/2p or 14.75 percent. Barratt’s shares fell 29p or 5.5% to 501p. This was due to a nearly 60 million pound increase in money set aside by the company for fixing dangerous cladding. Barratt warned that it could have to spend up to £90 million to replace cladding at a development it’s testing.
Barratt shareholders would own two-thirds of the enlarged group (to be called Barratt Redrow), while Redrow investors would own the remaining one-third.
Caroline Silver (61), who joined the Barratt board in the summer of last year, will chair the group. David Thomas, 61 years old, will remain as the Barratt CEO. Matthew Pratt (48), Redrow’s CEO, will join the Barratt Redrow Board and continue to manage the Redrow business.
Thomas stated, “This is a great opportunity to combine two companies that are highly complementary, creating a homebuilder with exceptional quality, service, and sustainability. We can build more high-quality houses for this country.”
Pratt stated: “Redrow combined with Barratt creates a UK leader in homebuilding.” Together, we will be in a better position to provide a wider range of energy-efficient and high-quality homes to our customers.
Steve Morgan, 71 years old, who founded Redrow as a drainage contractor in 1974, has given the deal his blessing and will vote for it with his 16 percent stake.