Barratt-Redrow merger highlights gulf between big and small players

Barratt Developments’ £2.5bn recommended bid for rival Redrow risks creating a housebuilding “super league”, experts have warned.

The deal, which represents a premium of 27.2% to Redrow’s closing share price on Tuesday 6th February, would extend Barratt’s already market-leading position and create a £7bn combined business called Barratt Redrow.

Equities analyst and consultant Alastair Stewart said the merger reflected an increasing gulf between the large and smaller housebuilders. “I don’t think anybody saw this coming,” he said. “In the wider market, there is a new super league developing among the housebuilders. It was happening already, but there is a growing gulf between the biggest housebuilders. The question is: who’s next?”

Brian Berry, chief executive of the Federation of Master Builders, warned the merger “reduces the number of larger housebuilders” at a time when the industry needs “diversity and choice”.
“We’ve not seen an SME housebuilder grow into a larger one for the past 30 years, which indicates a broken housing market,” he said. “There’s a wider issue where larger housebuilders have market dominance – 90% of all new homes are built by the larger housebuilders. It raises the need for more SMEs to have a wider market share, and that means looking at the barriers SMEs are facing.”

Andrew Southern, chief executive of developer Southern Grove, agreed: “The acquisition is indicative of the way it’s all going, with super companies that are out taking huge operational efficiencies through standard practices.” Regarding private housebuilders, Southern said: “Will they exist in their current form or will they have to adapt? The reality is they will have to adapt.
”The days of buying unconditional land, going to get planning and knocking out some for-sale housing – I just don’t think it’s going to be the case. Too much risk and capital is tied up. Joint ventures and clever structuring to maintain profit levels is the only way to kickstart housing.”

Berry added that a Competition and Markets Authority (CMA) investigation into the deal was possible, but Rico Wojtulewicz, head of housing and planning policy at the National Federation of Builders, said he did not believe this was likely. He added that one of the primary reasons for the merger may be to support Barratt’s off-site timber-frame factory in Derby. “Barratt has invested £45m in an off-site facility,” he said. “Most off-site factories have failed because the planning pressures are so uncertain. I feel part of this is because they’ll have more planning permissions ready to go, so they can start delivering the offsite factory method with more certainty.”

Stewart added: “On some of the bigger sites, they were putting two brands down, David Wilson and Barratt. Now they’ll have a very differentiated third brand. So, they can sell from different parts of the site very different products, which will appeal to different demographics.”