The small end of the listed housebuilding sector gave way to City pressure in dramatic fashion this week as a flurry of companies revealed plans to leave the stock market.
Two of the firms, Ward and Linden, announced management buyout plans and a third, Furlong Homes, agreed to a bid by private rival Gladedale – a deal that will eventually see Furlong delisted.
All three complained that City institutions had failed to fully recognise the improvements in housebuilders’ performance in recent years.
Linden, the largest of the housebuilders, is talking to a small number of venture capitalists about a management buyout, to be led by chief executive Philip Davies and rumoured to be
worth about £80m. Furlong Homes, which is listed on the Alternative Investment Market, looks likely to be sold to Gladedale for £23.2m.
I would think there will be many more buyouts because shares are undervalued
Jim Furlong, Furlong Homes
A second buyout is well-advanced at Ward Homes, where chief executive David Holliday is leading a £34.2m bid for the firm.
An insider at investment bank Close Brothers said that with buyouts taking place in the manufacturing and engineering sectors, this week’s developments were part of a wider trend. “There is now a now a bow-wave of
buyout activity among smaller companies,” he said. “A lot of banks and venture capitalists used to raise their eyebrows and worry about when they could get a return by exiting, but they are now waking up to the trend. It’s a definite phenomenon.”
Davies agreed, saying that smaller housebuilders formed “another category of the great unloved”, by virtue of being both small and in the construction sector, which is seen as risky and cyclical.
Holliday said many housebuilders were “very cheesed off” with not getting recognition on the stock market. “When I come to the City and do presentations, investors say ‘thanks very much,
Investors say ‘thanks, but I could be putting £20m into BT instead of £2m into you’
David Holliday, Ward Homes
but for the amount of time I’ve spent listening to you I could have spent listening to BT and be putting £20m into them instead of £2m into you’,” he said.
Furlong chairman Jim Furlong said that, although his firm’s shares had a relatively good rating, many smaller firms’ share prices did not reflect their true value. “I would think there will be many more management buyouts because shares are undervalued,” he said.
The smaller end of the housebuilding sector experienced a period of buyout activity in late 1998 and early 1999, with a number of companies going private: Banner in January for £18m, Wainhomes in March for £88m, Avonside for £22m in April and Cala for £95m in May.
With £200m-turnover Fairview in talks over a buyout worth about £300m and other players, including Countryside, rumoured to be considering the move, City experts say this round of rationalisation is set to be even larger.
Barry Saint of Dresdner Kleinwort Benson said companies that go private will be able to raise cash for expansion through debt, which is far cheaper to service than equity, particularly with interest rates at historically low levels.
Smaller housebuilders form another category of the great unloved
Philip Davies, Linden
“Most investors aren’t interested in companies under £100m, so many firms are getting thrown back onto the debt market,” he said. “You can gear up a public company, but you can gear up a lot more in the private domain.”
According to analysts, cash deals such as those offered by Gladedale and the Ward management team have become very attractive to investors, who are now prepared to sell at the right price to realise at least some of the value of their investments. Many will put their money into technology-related stocks or larger firms with better growth prospects.
Despite the fact that almost every listed housebuilder enjoyed record profit last year, the sector has suffered in the rush for Internet, telecommunications and media stocks. And although sentiment has turned back slightly towards old economy stocks, fears over rises in interest rates have held down housebuilders’ shares.
John Morgan, chief executive of major contractor Morgan Sindall, warned that going private was not necessarily a solution to the problems of being small. “In a sense, you are only swapping one set of shareholders for another,” he said.