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 鈥� a deal that will eventually see Furlong delisted.
All three complained that City institutions had failed to fully recognise the improvements in housebuilders鈥� 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 拢80m. Furlong Homes, which is listed on the Alternative Investment Market, looks likely to be sold to Gladedale for 拢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 拢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鈥檚 developments were part of a wider trend. 鈥淭here is now a now a bow-wave of
buyout activity among smaller companies,鈥� he said. 鈥淎 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鈥檚 a definite phenomenon.鈥�
Davies agreed, saying that smaller housebuilders formed 鈥渁nother category of the great unloved鈥�, by virtue of being both small and in the construction sector, which is seen as risky and cyclical.
Holliday said many housebuilders were 鈥渧ery cheesed off鈥� with not getting recognition on the stock market. 鈥淲hen I come to the City and do presentations, investors say 鈥榯hanks very much,
Investors say 鈥榯hanks, but I could be putting 拢20m into BT instead of 拢2m into you鈥�
David Holliday, Ward Homes
but for the amount of time I鈥檝e spent listening to you I could have spent listening to BT and be putting 拢20m into them instead of 拢2m into you鈥�,鈥� he said.
Furlong chairman Jim Furlong said that, although his firm鈥檚 shares had a relatively good rating, many smaller firms鈥� share prices did not reflect their true value. 鈥淚 would think there will be many more management buyouts because shares are undervalued,鈥� 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 拢18m, Wainhomes in March for 拢88m, Avonside for 拢22m in April and Cala for 拢95m in May.
With 拢200m-turnover Fairview in talks over a buyout worth about 拢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
鈥淢ost investors aren鈥檛 interested in companies under 拢100m, so many firms are getting thrown back onto the debt market,鈥� he said. 鈥淵ou can gear up a public company, but you can gear up a lot more in the private domain.鈥�
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鈥� 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. 鈥淚n a sense, you are only swapping one set of shareholders for another,鈥� he said.
