There are about 20 quoted housebuilders in the UK with a market capitalisation of between £20m and £1.5bn, but hundreds of non-quoted developers running very good smaller businesses. The costs of a flotation are becoming quite inhibitive, so agreed bids of this nature provide a nice exeat for the founders of or investors in the acquired company – and the Kiers of this world enjoy discreet negotiations.
Rumours continue to circulate in the middle market-cap stocks that there will be another big merger where either location or house price is the key. With much talk of some housebuilders seeking admission to FTSE 100, the acquisition of a stock of between £400 and £600m would certainly propel a £1.2bn stock into the premier 100 companies in the UK. There have also been rumours of the merging of two mid-sized stocks to produce a national player. I would settle for a more appropriate price–earnings ratio for all housebuilders.
Clearly, the main attraction of a purchase is the chance to increase one's landbank. And as the land is integrated into the bidder's regional offices and overheads are reduced by rationalising the vendor's administration, serious cost savings result. Profitability on developments using land acquired by this method often improves in short order.
For the vendor, once the mansion in the suburbs and villa in the Costa del Developer are paid for, a few mill in the bank should enable them to maintain the style to which they have become accustomed. It also means that some other poor sod must deal with all the planners, bankers and brokers at a time when the industry could be facing more difficult times.
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