Housebuilders have found that being quoted on the stock exchange is more about slavery to the City than building homes. So they've said goodbye to analysts and investors and regained their freedom.
The management team at Fairview Homes couldn't wait to say goodbye to the City. Frustrated at the lack interest from investors and tired of endlessly trying to talk up its share price, the housebuilder called it a day in January when it engineered a management buyout, delisting after two years on the London Stock Exchange.

The split was amicable: Fairview was relieved to be free of the confines of life as a listed company and its investors were happy to have the chance to unload their shares at a premium to their market value. The rest of the City hardly noticed.

Director Richard Westcott, then finance director of Fairview, says being a publicly listed company was not worth the trouble. "There was a certain degree of antipathy towards us no matter how well we performed. There was a lot of frustration." Fairview is the latest in a long line of small and medium-sized housebuilders that have waved goodbye to the City. In the past two years, at least seven companies have gone private through buyouts backed by venture capitalists. Construction's recent rally on the markets may lead to a temporary respite from buyouts, but if the sector's long-term underperformance continues, more firms may follow them.

Most of these companies floated to raise money to fund growth. By issuing shares to big institutional investors, they banked wads of cash. What they discovered was that those investors wanted their pound of flesh in return: growing dividends and rising share prices. Many sold up and took their money elsewhere when these did not materialise, leaving the companies languishing in the stock market's outer darkness.

As Westcott found out, they were at the beck and call of faceless suits, many of whom, the housebuilders complained, did not understand their industry.

Westcott says things have already improved for Fairview since it went private, mainly because it doesn't have to worry about pleasing investors and analysts with different priorities.

For David Holliday, chairman and chief executive of Ward Homes, who took his company private last July in a £35m buyout, this freedom is what he savours most. Holliday is free to take a longer-term view rather than trying to appease people whose only concern is the next results. He is also free from the need to court people who could not care less about him or his company.

Holliday says that no matter what the £70m-turnover company did, or what he said, there was no interest in the City. "I would give presentations where the analysts and brokers would say: 'Great presentation, but why should I invest £2m in you when I can put £20m in BT? I can't make any money by listening to you'." Peel Hunt analyst Stephen Rawlinson explains the apathy. "There is a small appetite for housebuilders in the institutions because they don't deliver a lot of cash back. They have to invest in land rather than making dividends." Despite this lack of interest, listed companies still have to play the game by City rules. This means paying for brokers, analysts, brochures and public relations firms to paint the company in the best possible light. The legal requirements that come with listed status also mean big legal bills. It all adds up to about £500,000 a year.

Then there are the strict deadlines companies have to meet for their interim and annual results. Firms have to gear their whole businesses to making these look good, for example by selling as many houses as possible just before results time. Once they are released, they have to be marketed and this takes up a lot of time: "It was a hell of a lot of work," says Holliday.

The City game
Westcott says Fairview never put as much time, effort and money into buttering up analysts, brokers and the press as other companies. Fairview had been dumped onto the stock market in 1998 after its parent company, Hillsdown, spun off its housebuilding operations. Westcott says it was not something that the Fairview directors would have done voluntarily and they always wanted to take the company private.

There was a certain degree of antipathy towards us no matter how well we performed. There was a lot of frustration

Richard Westcott, director, Fairview Homes

But wooing the City is vital if companies want access to the billions of pounds of investor funds. If the analysts do not like what they hear, they can recommend that investors sell their stake, forcing the company's share price down. Investors will then steer clear of a company with a low share price, which leaves it vulnerable to takeover from any rival willing to offer investors a higher price for their stakes than they would have got on the stock market.

However, the low share price can work in a management team's favour, as it means it does not have to pay as much to buy back its shares – and can still give a premium to investors. This is why there was a rash of buyouts in 1999 and 2000 when the share values of housebuilders and contractors reached their nadir. The expectation is that now the industry is enjoying a tad more popularity, many buyouts will be prohibitively expensive.

Westcott says the low rating of the housebuilding sector as a whole allowed the Fairview management team, led by founder and chief executive Dennis Cope, to take the company private in a £307m buyout. "It was an opportunity to take the business private at a price that might work for us," he explains.

But there is another risk facing listed companies. Fluctuations in stock markets, which are beyond the control of individual firms, can wipe off millions of pounds from the value of listed companies. A herd of share brokers in New York or Frankfurt that suddenly stampedes can trigger similar behaviour in stock markets around the world. Low share prices also hurt a company's image and can affect staff morale.

So why go public?
But there are risks in going private, too; some listed companies say a buyout simply replaces one set of shareholders with another. Venture capitalists, such as 3i, who funded the buyouts generally look to get out of the deal after five years. If the companies have not repaid the loans, this can leave them high and dry with little alternative but to relist to pay off their backer. This is why Fairview is upping production over the next two years: to pay off its loan as soon as possible.

David Taylor, an analyst for broker Teathers and Greenwood, paints a more positive picture of life as a listed company. He says the benefits of going public can be great if the company gets it right, as, say, Berkeley Group did in the 1980s. The biggest advantage is that companies can raise funds for takeovers and acquisitions. This can be done through issuing shares in the company or by making a rights issue, in which existing investors are offered more shares in the company.

Taylor says private companies' growth is largely limited by how much cash can be generated from within the company or borrowed from banks. But being listed and being able to use investors' funds gives companies more funds to expand through takeovers or acquisitions. He points to EBC, the smallest listed contractor, as a good example of why companies play the City's game.

Chief executive Garvis Snook says it was the City's support that enabled Exeter-based EBC to buy property development company Rockeagle for £14.7m. EBC used a combination of investor funds and new shares to pay for the deal. Snook says it would have been much harder to pull off if the company was private and did not have access to investor funds. "Our ambitions can only be achieved with the City's support to fund our future growth. If we were private, we probably wouldn't have the funds to do what we want to." Snook visited 13 institutions to drum up support for his expansion plans. The hard work paid off with 11 investing in EBC despite a turnover of only £95m. "I found they were willing to listen to what they see as strong management vision. It's all down to communication and it's up to you to get the message across and sell yourself." But until Snook took over last year and started a restructuring plan that cut 100 jobs before going for expansion, EBC had drifted on the stock exchange. It was listed in 1983 but by the mid-1990s it had lost all of its big investors.

Going private

Construction sector share prices have consistently underperformed, falling steadily in comparison with the FTSE all-share index. Seven housebuilders have taken advantage of low prices and executed management buyouts: 1 Banner Homes led the wave of delistings when it went private in January 1999 after 11 years as a public company. The £18m buyout was backed by venture capitalist 3i. 2 Wainhomes founder Bill Ainscough took the Lancashire housebuilder private in March 1999 in an £88m buyout. It was recently sold to Wilson Connolly. 3 Avonside, the building services group, went private in April 1999 after a £22m bid from managing director Craig Slater. 4 Cala, a Scottish housebuilder opted out of the share market in May 1999 in a £95m buyout after the management’s long public battle with fellow housebuilder Miller. 5 Ward Homes Kent-based company went private in July 2000 following a £35m buyout led by chairman and chief executive David Holliday. 6 Linden chief executive Philip Davies kick-started the buyout drive again last November with a £73m deal. 7 Fairview was the most recent and biggest buyout with a £307m deal led by executive chairman Dennis Cope and backed by 3i. It was a listed company for only two years.