(Bloomberg Opinion) -- Homebuilding has been a better bet than the wider construction business in the U.K. — the former benefits from government subsidies, while the latter is plagued by intense competition for long-run, hard-to-value contracts. Being in both markets has become a headache for Galliford Try Plc. It is now artfully dealing its way out of the problem.
On Tuesday, the company said it could sell its homebuilding operations to rival Bovis Homes Group Plc for 1.1 billion pounds ($1.33 billion). That’s 50% more than Galliford’s entire enterprise value as of Monday’s close — proof of investors’ dim view of the construction business rather than evidence that Bovis is overpaying.
This deal is yet to be inked. Assuming it happens, it will be a stretch for the purchaser, financially and operationally. Bovis will assume 100 million pounds of Galliford’s debt, plus its pension program (which is, admittedly, fully funded). The acquirer will give the target’s shareholders a 29% stake in the enlarged company and will pay an additional 300 million pounds in cash. To fund that, it will have to sell new shares. Even this will cover only about half of the sum — much of the rest will have to be borrowed.
Meanwhile, the buyer is taking on a colossal integration project, adding more people than it currently employs. Given Galliford’s stock has fallen so far, Bovis could probably have stretched to buying the whole company. Luckily it stopped short of that: Combining just the homebuilding is a mammoth job in its own right without adding a construction business too.
For now, the market isn’t giving Bovis Chief Executive Officer Greg Fitzgerald the benefit of the doubt. It could scarcely be a worse time for a domestically focused U.K. company to be selling new shares: Investors are hardly rushing to double down on the country’s housing market in a complicated deal ahead of Brexit.
Galliford shares rallied a little on Tuesday, although the combined market value of the businesses fell slightly. That may be a sign Galliford is getting something at Bovis’s expense, but the market isn’t sure about the overall value creation here.
That looks harsh. The logic of the combination is sound. There are plausible cost savings from joint procurement, and the valuation put on the assets Galliford is selling, about 5.2 times their trailing operating profit, isn’t expensive compared with others in the industry. It’s reassuring, too, that Fitzgerald used to chair Galliford.
But whether you’re in homebuilding or construction, attracting investors to what must be the two least attractive sectors in the U.K. economy is going to be a tough sell this side of Brexit.
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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