Housebuilder’s boss’ record comes under scrutiny
Five years from now, the board of Barratt will no doubt look back at last week’s share price meltdown and smile as they recall the premature rumours of their company’s demise.
But it is far from certain that Mark Clare, the housebuilder’s 51-year-old chief executive (pictured), will be there to share the joke.
Many commentators have questioned how well he responded to the sequence of events that started with the run on Northern Rock last summer and ended with the collapse of housebuilders’ share prices last week. The calls for him to go, which started at the beginning of the year, are getting louder as the feeling grows that Barratt has not reacted as decisively as its peers in the deteriorating market.
The £3bn-turnover company has survived share plunges before, most notably during the recession of the early nineties and after a World in Action documentary about the safety of its timber-frame houses in 1983.
But last week’s fall was spectacular: the firm’s price halved from 120p to 60p between Monday and Wednesday.
The drop was the result of short selling by hedge funds (see box). A source close to the company said Clare was “seriously irritated” by the way traders made money after the shares went into freefall. He is understood to want the Financial Services Authority to investigate what he described as the share price “becoming unhinged from normality”.
What is not clear yet is the effect that a few hedge fund managers have had on the job security of Barratt’s 5,500 staff.
On its own, a nose-diving market cap will not trigger a breach of banking covenants, but it will make an uncomfortable backdrop to the “grown-up” talks Barratt is having with its lenders.
The main topic of conversation will be its £1.8bn of debt and whether its land writedowns in July will result in breaches in asset covenants (that is, the ratio of its assets to its debt).
The weakness of Clare’s position is not entirely based on Barratt’s financial performance. There is also what many in the City have perceived to be a flat-footed response to the events of the past nine months and a sense that he has a poor grasp on what makes the sector tick; his previous job was managing director of British Gas Residential Energy, which he left in October 2006.
Eyebrows were raised when Clare abandoned the firm’s longstanding policy of organic growth and paid £2.2bn in cash (£900m) and shares for Wilson Bowden last February – the very top of the market.
A falling market cap will not breach banking covenants, but it will make an uncomfortable backdrop to talks Barratt is having with its lenders
On 17 January this year, a deeper sense of unease about Barratt’s modus operandi emerged. In a statement to the City, Clare described trading as “satisfactory” and the forward order book as “encouraging”. A week earlier Bovis Homes had pointed to an “unclear” outlook and called on the government to cut interest rates. Did the industry outsider not see what others were hinting at?
Not according to some. His next public statement caused serious questions to be raised about his suitability for the job among some in the City. When the company’s interim results were announced on 27 February, Clare said: “The year has started well. We have increased outlets, and have a strong order book. Visitor and reservation levels continue to improve and we are optimistic this will continue through the spring selling season.” A day earlier Persimmon had said: “When confidence returns and sentiment improves we anticipate a return to a stronger market; in the meantime we remain cautious.” Not everyone is so quick to attack Clare. In person he is affable under questioning and there is a feeling he is a victim of circumstances.
He was brought in specifically to make a big acquisition, causing one analyst to say: “You have to have a certain amount of sympathy for him.
Imagine you’d just written a £2.2bn cheque for Wilson Bowden. To then tell people you’re going backwards at a rate of knots is difficult to do. Human nature is to wait and see.”
Clare himself has batted away speculation he may be forced out and it is unlikely that such a corporate climber would leave a chief executive’s job readily. Speaking to Building this week, he said: “There have been no discussions about my future with the board. They are very supportive of our strategy and the team we have.”
He dismissed questions over his purchase of Wilson Bowden, saying: “It was a transformational deal that has given us extra capacity and will see us in a very strong position once the industry recovers from the credit crunch.”
He also hit back at criticisms of his relative inexperience in leading a housebuilder in a downturn pointing to a cost-cutting programme of £40m, that is to be increased further. “I don’t think what we have been saying to the City is overly optimistic – it is realistic. At the start of the year our forward order book was only down 7%. We made it clear that we weren’t in a good position but not as bad as some.”
Then there is the question of redundancies. In spring many housebuilders responded to the downturn by cutting staff. Barratt took another tack. It spoke about cutting its supply chain by 20% and instituting a recruitment freeze. Most agree that if it has not already quietly made redundancies, it should.
Taylor Wimpey, which is groaning under a similar debt of £1.4bn, and is exposed to the fragile US market, made 600 redundancies and carried out a restructure. This decisiveness bought Pete Redfern, its chief executive, some time.
Clare might not be so lucky. In a statement to the City made in response to the drop in Barratt’s share price, he attempted to calm nerves by saying land writedowns in July would be “limited”.
It didn’t work for some. One analyst said: “That shows he simply doesn’t get it. Any housebuilder will tell you that you want to make writedowns as heavy as possible in one go. Based on the assumption that a breach is inevitable, it would improve the balance sheet in the long run and means you can sell units more cheaply than your rivals. Investors also want to see a line drawn in the sand. The last thing they want is death by a thousand cuts.”
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