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City Site - Special case McCarthy bucks up


FEW COULD have predicted an outbreak of bid activity so soon after the recent tumble in the stock market. But last week's news that McCarthy & Stone has received a number of approaches and the conservatory-maker Ultraframe is to be taken over should help to shore up confidence in the sector.

McCarthy is a niche business which has attracted bid interest in the past and the consensus in the City is that independent investors rather than rival house builders are behind the approaches. As it is, analysts were struggling to justify the peak stock market valuation of £932 million that the company reached last week after a 17 per cent surge in its share price.

Few general house builders have made significant headway in the sheltered housing market. Indeed, the strength of McCarthy's brand and the heavy working capital involved in building sheltered housing schemes have created significant barriers to entry.

For a would-be buyer, the company's 65 per cent of the UK market for sheltered housing for the elderly and its historically generous margins are attractions. But as the group's experience in the last downturn showed, McCarthy can be among the most vulnerable when the housing market slows. Old folk who cannot sell their homes are inclined to stay put.

The group's latest interim results in April showed a 20 per cent fall in interim pre-tax profits and its operating margins under pressure, particularly from rising building costs and more part exchange.

Given that it is a special case, it is unlikely a bid for McCarthy will trigger consolidation elsewhere in the sector.

For now, house builders are likely to be more concerned with a market which, whilst it might have been hotting up in the capital, is flat across most of the country as potential purchasers worry about rising interest rates. The news from the US, where house builders have seen a dramatic downturn in orders so far this year, will provide little reassurance.