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Bovis Homes - two merger proposals received and rejected

George Salmon | 13 March 2017 | A A A
Bovis Homes - two merger proposals received and rejected

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Vistry Group Plc Ordinary 50p

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Bovis Homes has confirmed it recently received and rejected two merger proposals. These possible offers were a cash and shares proposal equal to 814p per share from Redrow, and an all-share proposal from Galliford Try, which would value the group at 886p per share.

After indicating to both groups that the terms of these proposals were not satisfactory, Bovis says discussions with Redrow have not continued, but talks with Galliford Try remain ongoing. There can be no certainty that an offer from either party will be forthcoming. The shares rose 9.9% on the news.

Our View

2016 results saw profits fall and completions lower than previously anticipated. Many of the group's homes were delivered below the standards expected and £7m was set aside for customer redress. The results came shortly after David Ritchie stepped down after 8 years as CEO.

While Bovis has struggled in the months after the referendum, still grappling with its longer term problem of controlling build cost inflation, the rest of the sector is holding up well. Despite uncertainty over the UK's vote to leave the EU, support comes from several sources. The UK still faces a major housing shortage and government schemes such as Help to Buy continue to assist first-time buyers. In addition, the Bank of England's decision to cut interest rates back in August is helping to keep mortgages affordable.

With current difficulties symptomatic of internal rather than sector-wide issues, and other builders increasingly exuding an air of confidence, talk of a deal had been building. For both Redrow and Galliford Try, the potential to sharpen up Bovis' performance and the opportunity for greater scale has clearly proven interesting enough to test the water. Each has spoken of its intent to expand geographically, and merging with Bovis would certainly beef up their exposure to the South of England. Redrow has stepped away from the table for now, but it would be premature to say it definitely won't be coming back.

Takeover talk aside, the interim leadership team has announced measures to right previous wrongs, and improve both the build process and customer service levels. While this feels the right thing to do in the long run, implementing these measures will likely hold back progress in the short term.

If a deal is not done, we feel Bovis will need to get its house in order pretty sharpish. After all, the favourable conditions in the sector won't last forever.

Full year trading:

The group was unable to deliver the anticipated unit sales and customer service performance in the second half. With labour and material cost inflation continuing, and the deferral of 180 homes into next year, profit margins fell from 17.3% to 15.2%. Despite average sales prices rising 10% to £254,900 and completions nudging up to 3,977, profit before tax was £154.7m, down 3% on 2015.

The group suspended investment in new land around the time of the EU referendum, so has ended the year with 18,704 plots in its land bank, as opposed to 19,814 last year.

The group is to increase its focus on customer service, meaning that its rate of production and completion volumes for 2017 are to be 10 to 15% below 2016 levels. While the 2016 dividend is increased 13% to 45p per share, the group intends to hold the dividend flat in 2017.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.