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If at first you don't succeed, Try Try again

The news that Bovis could be involved in a merger has sent pulses racing in the housebuilding sector.

Not since George Wimpey and Taylor Woodrow fluttered eyelids at each other to create a £5bn mega builder in 2007 has there been the level of excitement brought about by Galliford Try’s all-share approach and Redrow’s cash and share offer.

We spoke to the analysts to see what they thought today and the mood was mixed.

Canaccord Genuity director Aynsley Lammin likes the look of both moves, as Bovis continues talks with Galliford Try after spurning Redrow’s approach.

He said pursing an all-share merger  would “avoid gearing up the balance sheet”.

But Charlie Campbell at Liberum called the moves “opportunistic”. He also raised the point that this could be an interesting route into a market for someone not currently developing in UK housebuilding.

He pointed to Skanska’s decision to sell its UK housebuilding arm in 2013 as a reason why it may now be attracted again, in that it would effectively be adding a non-competing business.

The contractor said at the time that it was pulling out of residential development (it continues to build as a contractor in the sector) in the UK, saying it could make better returns in infrastructure, commercial development and construction.

But there’s a reason why an infrastructure provider like Galliford Try is putting its eggs in the housebuilding basket.

Its housing arm Linden Homes had an operating margin in excess of 18 per cent in H2 2016. Its construction arm recorded just a 0.4 per cent margin, though admittedly this was weighed down by projects associated with its Miller acquisition.

If Galliford does complete the merger, it will lead to renewed speculation over the future of its construction arm.

It also gives an insight into the thinking of its board. They have been keen to push the ‘hybrid model approach’ in recent years, effectively seeing the group take cash generated in construction and recycle it into housing at much better margins.

But how would that sit as part of a £2.5bn housebuilding merger?

Who else might be keen? Kier? It has slowed its acquisitions and is thought to want to sit tight for now, but it did sell Mouchel Consulting for £75m last year and help reduce its debt profile at the same time.

Most importantly, 8 per cent of Kier’s business in 2015/16 came from the residential sector but that accounted for 11.6 per cent of profit. Compare that with the construction business, which accounts for 48.2 per cent of revenue and just 27 per cent of profit.

Liberum points out that the overhead to sales ratio is 5.3 per cent at both Redrow and Galliford Try compared to 7.2 per cent at Bovis, meaning there is scope for an acquirer to improve returns.

Galliford Try and Redrow now have until 5pm on 9 April to make a formal offer or announce they are not making an offer.

In other news

Deputy editor James Wilmore has five things to look out for in Balfour Beatty’s results on Thursday

More M&A news, as oil and gas giants Wood Group and Amec Foster Wheeler agree to a £5bn all-share merger.

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