- Barratt offers 1.44 shares for one Redrow share in all-stock deal
- At Tuesday’s closing prices, the bid implied a value for Redrow of 763p a share, a 27% premium
- The implied multiple of book value offered for Redrow implies Crest Nicholson, Bellway and Taylor Wimpey remain cheap
- Another major (and unloved) UK stock market sector that is cheap relative to its assets is banks
“The old stock market saying, ‘you can have cheap shares and good news, just not both at the same time,’ is proving its worth once more, as housebuilder Barratt Developments looks to swoop for rival Redrow in an all-stock deal,” says AJ Bell investment director Russ Mould. “Shareholders in Redrow seem happy, those in Barratt less so, judging by the initial share price response, but the offer price of 763p implied for the target, using the closing prices of Tuesday night, suggests that it is not just Redrow that is cheap, as Crest Nicholson, Bellway and Taylor Wimpey look like bargains too.
“FTSE 100 member Barratt is offering 1.44 of its own shares for every one share of Redrow. As of the close on Tuesday, when Barratt ended the day at 530p, that meant the all-stock offer represented a 27% premium to Redrow’s 600p share price.
“It also valued Redrow at 1.29 times its historic tangible net asset value (TNAV), or book value, per share, compared to the 1.02x multiple that prevailed at Tuesday’s close.
“That brings in another rule of thumb, namely that builders are potentially cheap when they trade around one times book value and below and are probably expensive when they trade toward two times TNAV and above.
“It also begs the question of what this price tag means for other builders, allowing for how they have, in some cases, different business mixes, target markets and geographic exposures.
Source: LSEG Datastream data, Company accounts, Marketscreener, consensus analysts’ forecasts. Based on share prices as of the close on Tuesday 6 February.
“Crest Nicholson, Bellway and Taylor Wimpey look cheap compared to the 1.29 times TNAV implied by the undisturbed Barratt share price and even Tuesday’s early-morning falls in Barratt, which trim the value of the offer for Redrow and the implied multiple of book value, still leave the shares offering some upside.
Source: Company accounts. Based on 1.29 times multiple of historic book value implied by Barratt’s all-stock offer, using Tuesday night’s closing prices.
“Barratt’s shareholders seem less impressed, especially as management is taking on a lot of integration risk to squeeze out £90 million in costs from two businesses that are forecast to make combined operating profits of £550 million in their respective fiscal years to June, and increase the Barratt share count by 48% in the process – 476 million new Barratt shares will be offered, compared to the share count of 1.008 billion as of June 2023.
Source: Company accounts, Marketscreener, consensus analysts' forecasts
“However, there are some wider positives for them to mull.
“First, Barratt feels now is a good time to position itself for the next upcycle in the UK housing market, where prices are proving resilient and headline interest rates may be passing their peak, at least if the Bank of England delivers on the cuts that financial markets currently expect for 2024.
“Second, Barratt is not paying a lofty multiple of book value for Redrow.
“Finally, the deal may be a further example of how the unloved UK stock market may just contain more than a few undervalued nuggets. Investors could certainly be forgiven for thinking what other sectors or stocks look cheap, because sentiment toward them is so depressed, and using the metric of book value perhaps the most downtrodden grouping of all is the banks, another area where fears of recession still lurk. Again, multiples below one times TNAV predominate.”
Source: LSEG Datastream data, Company accounts, Marketscreener, consensus analysts’ forecasts.
