In a statement, Bovis, whose share price dropped 2.83% to 1,029p, said that the “potential combination” only related to Galliford’s housing businesses rather than the whole company.
If the deal, valuing the housebuilding division at £1.08bn, was completed then Galliford would remain a separate UK-listed non-housing construction firm owned entirely by its shareholders.
Bovis said that the two firms had agreed high-level terms but that significant work remained to complete the deal. It would mean quite a pay-out for Galliford Try shareholders who would receive 0.57406 Bovis shares for every one of their shares, equalling £675m.
Bovis would pay £300m in cash to Galliford and also take on a 10-year debt private placement of £100m.
Amount paid by Bovis Homes to Galliford
Why the tie-up?
The potential tie-up comes only five months after Galliford rejected a previous £1bn Bovis bid for not being in its shareholders’ interest. It is understood that Bovis’s £300m cash offer makes this new bid rather more attractive.
Greg Fitzgerald, chief executive of Bovis (and formerly chief executive of Galliford Try), said that the combination would create a “leading UK housebuilder” delivering much-needed affordable homes. Graham Prothero, boss of Galliford, added: “The significant cash element provides a firm foundation for our newly reorganised construction business to flourish as an independent company.”
“The significant cash element provides a firm foundation for our newly reorganised construction business to flourish as an independent company” - Galliford CEO, Graham Prothero
This is the key to the deal for Galliford shareholders. Can its construction division flourish as a standalone business?
Russ Mould of AJ Bell said this was a concern the last time around. “Galliford feared that it would be left as a cash-strapped construction firm – not a good place to be as stakeholders in the likes of Carillion and Kier could attest,” he said.
Indeed, Galliford’s construction division has been in the doldrums, taking a £40m write-down in the value of projects in the spring. This included the overbudget Queensferry Crossing in Edinburgh.
This is partly why Galliford’s shares are short of the 1,032p level they sat at this time last September.
Its woes led to a strategic review of the construction division, which resulted in the loss of more than 300 jobs and a new focus on key sectors such as highways and water. It said annual revenues would fall from about £1.7bn to £1.3bn but it is targeting £15m of cost savings per year from 2021 and operating margins of 2% by that date.
Markets.com chief analyst Neil Wilson said that the £300m cash injection would be a welcome boost for the division. “It has been struggling, but the entire construction contractor sector is in the doldrums post-Carillion, with overruns and margin destruction now standard,” he said.
|PE ratio (TTM)||6.55||10.17|
|Quarterly Revenue Growth (YoY)||-4.20%||4.80%|
Galliford & Bovis Homes share price vitals, Yahoo Finance, 11 September 2019
Looking at both Bovis and Galliford, Tony Williams, analyst at Building Value, added: “This [merger] should have happened the first time of asking. Bovis will re-emerge as a different animal, and in a lean market, it can muddy the performance issues. For Galliford it is manna from heaven: it solves all financial issues and provides more cash than market value.”
Striking a note of caution however was Sophie Lund-Yates, analyst at Hargreaves Lansdown. She said that the logic behind the deal was “sound enough” but the price tag could weigh heavily on the two firms.
“Exposure to the new business and its land bank may well be good news for Bovis, but some may wonder if now’s the right time to be doing such heavy lifting, given the uncertain economic backdrop,” she said.
“Exposure to the new business and its land bank may well be good news for Bovis, but some may wonder if now’s the right time to be doing such heavy lifting, given the uncertain economic backdrop” - Hargreaves Lansdown analyst, Sophie Lund-Yates
Jefferies analyst Glynis Johnson was also wary, stating that the market will “question the timing of such a large deal given all the political and economic uncertainties”.