Is a Berkeley Group Holdings plc-Bovis Homes Group plc merger in the works?
Shares in homebuilder Berkeley Group Holdings(LSE: BKG) are charging higher today after the company published a better than expected trading update. Today's trading update also informed investors that the group is still on track to meet its long-term profitability target despite concerns about the level of the housing market. Specifically, Berkeley is planning to deliver at least £3bn of pre-tax profit over the five years to April 30 2021.
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Good and bad news
Berkeley's trading update contained both good and bad news from the company.
On the one hand, as noted above, management still believes the business can reach its long-term profitability target. However, on the other hand, the company warned today that underlying reservations year-on-year in the seven months to the end of February had declined by 16%. While this is a disappointing metric, the company noted that the market in the south east and London has started to stabilise, which means further declines in demand are unlikely.
The trading statement from Berkeley today also contained a thinly veiled attack on authorities for slowing down the company's construction business. A recent white paper from the government criticised homebuilders for not building enough houses fast enough -- something Berkeley's management apparently disagrees with.
In today's update, the company noted that changes to buying patterns within London, coupled with "planning environment and increased demands from the combination of affordable housing and community infrastructure levies" had led to new starts in the UK capital falling by "some 30%". Furthermore, Berkeley went on to declare that the firm has 58 sites in London and the south east of the UK, with 22 sites which are in the planning process or at which "it is unable to starton-site due to a number of pre-commencement issues."
Acquisition in the works?
Barring Berkeley's apparent criticism of the government's planning policy, today's update was an upbeat one for shareholders, but the one question that's now on everyone's minds is: will Berkeley swoop on its smaller peer Bovis Homes(LSE: BVS)?
Bovis has attracted the attention of Redrow and Galliford Try in recent weeks. Both firms have made an offer for the company, and both have been rejected. Bovis and Berkeley already have a history together. The latter's largest shareholder was pushing for a merger between the two groups at the beginning of the year. This first takeover dance eventually amounted to nothing, but with other predators now circling the business, Bovis could be more open to a friendly offer from the likes of Berkeley.
With a market value of £4.3bn compared to Bovis's £1.2bn, Berkeley certainly has more financial firepower than Redrow and Galliford which have market values of £1.8bn and £1.3bn respectively. Moreover, Berkeley has a debt-free, cash-rich balance sheet.
Considering the above, I certainly wouldn't rule out a merger between Bovis and Berkeley especially if Bovis management is particularly set against accepting an offer from Galliford and Redrow. Berkeley could be prepared to step in as a white knight.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Berkeley Group Holdings and Redrow. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
