Bidders descend on Bovis Homes

A decade after the near-disastrous merger of Taylor Woodrow and George Wimpey, the weekend brought evidence that housebuilders may finally have regained their appetite for large-scale deal making.

Redrow and Galliford Try ignited consolidation talk after it emerged that both had approached troubled rival Bovis Homes. The housebuilder, recently talked of as prey for Berkeley Group Holdings, is vulnerable to predators after the departure of chief executive David Ritchie in January.

That followed a profits warning and comes as a time when Bovis is also struggling with a number of well-publicised operational issues, including most recently a £7 million bill to fix badly-built homes.

Linden Homes-owner Galliford remains in talks with Bovis after initially valuing the Kent-based builder at £1.19 billion, or 886p per share - a 7% premium to the share price on Friday night.

Redrow is no longer interested, having also been rebuffed by Bovis, whose shares jumped as much as 10% to 911p Monday, a six-month high. Clearly, traders think a deal will be done here at a better price.

A combination of Bovis and Galliford - the sixth and eighth largest UK housebuilders by completions, respectively - would create the country's fifth-largest player with an output of about 7,000 homes a year. Barratt Developments, Persimmon, Taylor Wimpey and Bellway make up the top five.

The takeover interest opens up the possibility that more deals could follow in a sector starved of consolidation since a flurry of mergers in 2006 and 2007.

These included Persimmon's acquisition of Westbury Homes and Barratt Developments' purchase of Wilson Bowden. But the most significant was the tie-up of George Wimpey and Taylor Woodrow, which created a debt-laden company pushed to the precipice by the financial crisis.

Having won its battle for survival, Taylor Wimpey and other housebuilders have enjoyed a fairly spectacular run of growth since then.

Housebuilders appear unfazed by the current uncertainty in the UK economy and the ever-present risk that the house price bubble may be about to burst.

After dropping by about 40% in the wake of the Brexit vote, Taylor Wimpey's share price is now back where it was before last summer's referendum.

Builders say confidence remains robust, helped by government initiatives such as the Help to Buy scheme, and aided by low interest rates and a wide range of mortgage products. Demand continues to outstrip supply.

It remains to be seen whether Galliford Try or another housebuilder will be successful in persuading the Bovis board to back a merger.

Galliford's unsuccessful first proposal involved splitting the combined group 52.25% to Galliford Try shareholders and 47.75% to Bovis shareholders.

UBS analyst Miguel Borrega described the approaches from Galliford and Redrow as "opportunistic" and argues against reading too much into the potential for further deals.

He said: "In theory, we believe consolidation amongst two mid-cap homebuilders makes sense in order to gain scale and achieve cost efficiencies. However, attractive returns achievable on land limits options for cash transactions.

"We believe bids from other homebuilders are unlikely based on current good returns on land purchase: because of that, larger homebuilders will likely focus on organic expansion through land acquisition."

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