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City homes in on house builders


SUDDENLY the City has become interested in house builders.

Earlier this week, the share price of Berkeley Group rose by 5 per cent on the emergence of a potential takeover bid from the founder's son, Tony K Pidgley.

Meanwhile, one of the few remaining quoted house builder/contractors, Henry Boot, has declared its homes business is up for sale and shares in the other house builders, notably Wimpey, Persimmon and Countryside, have been climbing strongly.

The City might not share the house building industry's optimistic view of its trading prospects - reinforced by last week's interest rate cut and recent upbeat trading statements - but it is quick to sense when further consolidation may be in the offing.

Berkeley highlights the scope for bid potential in the sector. Even after this week's jump, the share price stands at only 687p compared with an estimated break-up value of more than 1,000p and a historic price/earnings ratio of six.

The group's heavy exposure to the overstretched London and south-east housing market and its £300,000 average selling price has prompted brokers to cut profit forecasts recently. But Berkeley has a strong record and a good brand.

Any offer could prompt bids for other lowly-rated house builders. A recent valuation exercise by broker SSSB suggested Berkeley was the cheapest of the majors, followed by Taylor Woodrow, Westbury, Wilson Connolly and Wilson Bowden.

Alternatively, private equity groups might become more interested in funding management buyouts in the sector.

After the recent major combinations involving Persimmon/Beazer, Wimpey/Laing Homes and Taylor Woodrow/Bryant, it would be a bold company that opted for a large acquisition at such an uncertain time in the cycle. And if land prices start to slide in a softer housing market, then bidding for a lowly rated quoted house builder would suddenly becomes less appealing.

But if the land market holds up, more takeovers could be the best way forward.