Shake up in housebuilding sector as Redrow board backs merger with Barratt

North West housebuilder, Redrow, is a merger target of housing giant Barratt, which values the Ewloe-based group’s shares at £2.524bn.

The proposed takeover has also been given the blessing of Steve Morgan, the Liverpudlian builder who founded Redrow 50 years ago.

The two boards said they have reached agreement on the terms of a recommended all-share offer for the combination of Barratt and Redrow and the merged business will be known as Barratt Redrow.

Under the offer terms, Redrow shareholders will receive 1.44 new Barratt shares for each of their Redrow shares. On the basis of the closing price per Barratt Share of 530p on February 6, 2024, this will represent a premium of approximately 27.2% to the closing price per Redrow Share of 600p on February 6.

On successful conclusion, Redrow shareholders will hold approximately 32.8% of the combined group and Barratt shareholders will hold approximately 67.2%.

Liverpudlian bricklayer, Steve Morgan, said: “During the 50 years since I founded Redrow, I could not be more proud of the unique reputation it has earned for building premium homes and thriving communities.

“Barratt is a home builder I have long admired due to their likeminded attention to quality. I am confident that the Barratt/Redrow combination with their three high quality complementary brands, will create a standout home builder for the future and accelerate the delivery of much needed homes across the UK.”

Matthew Pratt, Redrow Group Chief Executive, said: “Redrow and Barratt combined creates a leading UK homebuilder. Together, we’ll be in a much better position to offer a broader range of high quality and energy efficient homes to customers.

“The Redrow brand, with its premium, characterful homes, has an excellent reputation and will remain a key part of the combined group. As with Barratt, Redrow’s fifty-year success story is based on its people, products and supply chain partners. Both businesses are a great fit and there are many exciting opportunities to innovate and share knowledge across a range of different areas.”

David Thomas, Group Chief Executive of Coalville-based Barratt, said: “We have great respect for Redrow, its overall strategy, its leadership and employees, and its high quality homes and communities.

“This is an exciting opportunity to bring together two highly complementary companies, creating an exceptional homebuilder in terms of quality, service and sustainability, able to build more of the high quality homes this country needs. The combined group would leverage the respective strengths of both Barratt and Redrow, delivering significant benefits to our people, our supply chains, and – most importantly – our customers.”

The combined group will be renamed Barratt Redrow. Completion of the merger is expected during the second half of 2024.

The board of Barratt believes the combined group can be expected to achieve pre-tax cost synergies of at least £90m on an annual run-rate basis by the end of the third year following completion.

The one-off costs of delivering these savings are expected to total approximately £73m, with approximately 57% incurred in the first year following completion, approximately 32% expected to be incurred in the second year following completion and the remainder by the end of the third year following completion.

Redrow today issued interim results for the six months to December 31, 2023, which revealed a fall in revenues from £1.031bn in 2022 to £756m this year. Pre-tax profits also declined, from 198m to £84m. The interim dividend has been slashed by 50% to 5p per share.

The total order book declined by £300m to £800m, although net cash, excluding lease liabilities, rose from £107m to £121m.

The group said it has had an encouraging start to the second half with a significant increase in visitors, resulting in private reservations per outlet per week for the first five weeks of 0.52 (2023: 0.51).

Matthew Pratt

CEO Matthew Pratt said: “Despite numerous macroeconomic headwinds we have produced a resilient set of results. We continue to deliver on our proven strategy of creating aspirational homes from our award winning Heritage Collection, all situated in beautiful, well designed places.

“In recent weeks the housing market has shown signs of improvement, with increasing mortgage approvals and reduced mortgage rates with greater competition amongst lenders. This, in turn, has improved homebuyer confidence and raised the prospects of a return to a more stable sales market.

“With ongoing economic and regulatory pressures on the housebuilding sector, our ‘Better way to live’ purpose is ensuring we remain focused on long term sustainable value creation. Over the last six months, we’ve made a measurable and positive difference to society, delivering much needed new homes, investment in community infrastructure and nature, skills and training and have made credible progress against our net zero climate targets.”

He added: “We believe that Redrow is very well positioned to capitalise on any market upturn with tight cost control and a highly desirable product range which occupies a differentiated position within the new homes market.

“By operating with a social purpose and long term outlook we look forward to creating many more Redrow homes and communities for years to come.”

Eversheds Sutherland acted for Steve Morgan, the Redrow founder and largest shareholder with a team led by Daniel Hall and Steve Nash.

Russ Mould, investment director at Manchester investment platform, AJ Bell, said: “When an industry faces a difficult time consolidation is often the result and the proposed takeover of Redrow by Barratt Developments is evidence of that.

“Alongside news of the all-share deal, both businesses revealed a major downturn in trading which lays bare just how significant the impact of lower mortgage availability, rising costs and falling house prices have been.

Russ Mould, AJ Bell

“The new ‘Barratt Redrow’ will have greater scale and will hope to achieve material savings in areas like back-office functions as they are combined. The merged business will be financially robust with more than £800m of net cash on the balance sheet and this should underpin generous dividends.”

He added: “The deal has logic for Barratt as Redrow has consistently traded at a discount to much of the sector and is well diversified across different parts of the UK – apart from the London market which it exited a few years ago. It also doesn’t seem to have major skeletons in the cupboard around build quality or corporate governance like some of its peer group.

“Redrow’s management is fairly well regarded so it may raise some eyebrows that the board of the combined entity is set to be almost entirely dominated by Barratt directors, though Redrow CEO Matthew Pratt will continue to lead Redrow within the new structure.

“The fact Redrow founder Steve Morgan is on board with the deal is significant, although whether an increasingly interventionist Competition and Markets Authority will want to look at the deal, given Barratt is already among the country’s highest volume housebuilders, is open to question.

“Putting the emphasis on how this deal can help deliver the homes the country needs could be seen as an attempt to win over the regulator and politicians.”