Several shareholders give firm final warning over hybrid contractor/housebuilder model

Concerns have been raised about Galliford Try’s hybrid contractor/housebuilder model by a group of shareholders in the wake of last month’s rights issue.

According to sources close to the situation, several of its bigger shareholders would urge that the business be broken up if the second round of equity raising in two-and-a-half years failed to produce the predicted growth in its housebuilding arm and a share price recovery.

Last month, shareholders stumped up £119m to help expand Galliford Try’s housebuilding operation from 1,800 to 4,000 units by 2013.

It followed £144m in March 2007 for the acquisition of Linden Homes at the top of the market.

One source, who declined to reveal the names of the shareholders in question, said: “Several have made it clear to the company they need to make this one work. Part of the hybrid ethos is that the housebuilding arm uses the cashflow from construction, but it hasn’t been enough in their case.”

They added: “The institutions want to see value crystallised. If that is not recognised by the market, there would be pressure to hive off construction and become a pure housebuilder.” 

While some shareholders have voiced their concerns, it is understood others remain supportive of the hybrid model, although it is not known where individual funds stand. Its top five shareholders are Standard Life (5.7%), Co-operative Insurance (3.8%), Aberforth Partners (3.8%), Aviva Investors (3.4%) and Barclays Global Investors (3.2%).

Greg Fitzgerald, chief executive, declined to comment on the speculation, but pointed to the fact all shareholders had subscribed to the recent rights issue.

Another source said: “The pressure is on Galliford after Kier wound down its housing arm and Morgan Sindall is making significantly less open market housing revenue than it did a few years ago. Its unique position also leads to a lower stock market rating.”

Boardroom maths

According to the sums of Kevin Cammack at Cenkos Securities, if the construction arm was sold for £175m, the remaining housebuilding business would have a share price of 635p based on its net asset value. The share price on Tuesday was 356p. Cammack said: “If this sort of ratio persists there will be increasing pressure on Galliford Try to abandon its hybrid status."