Don’t be tempted to chase Bovis Homes (BVS) shares higher after a surge on takeover interest (13 Mar) to 900p. For the really big housebuilders, organic expansion through land acquisition is already delivering strong returns and this removes the rationale for any deal.

Unsolicited merger offers from mid-cap operators Galliford Try (GFRD) and Redrow (RDW) have both been rejected by the board of embattled Bovis.

Galliford Try proposed an all share merger that would split the combined entity 52.25% to Galliford Try shareholders and 47.75% to Bovis shareholders, implying a valuation of 0.56 Galliford shares for each Bovis share.

UBS calculates that, as of 10 March, the proposal valued Bovis at £1.2bn or 886p or a 7% premium to the previous trading day’s closing price.

Redrow has proposed £1.25 in cash and 1.32 new Redrow shares in exchange for each Bovis share, in addition to 30p dividend. This represented 814p per Bovis share based on Redrow’s share price of 499p or in other words a slight discount of 2%.

Talks with Galliford are ongoing and Redrow still holds out hope of reviving a deal but we think it would be risky to hold out for a hefty premium.

Separate from the M&A situation, Bovis has a significant job on its hands to rectify the problems which led to two profit warnings around the turn of the year, the departure of chief executive David Ritchie in January, and a £7m compensation payment to customers for defects in their new homes. (TS)

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