Two years ago Mark Clare was riding high. He was a director at Centrica and
cited as a future chief executive of the £11 billion energy group.
Then he received a phone call from a headhunter to ask if he was interested in
becoming chief executive of Barratt, one of the country’s biggest
housebuilders. It didn’t take much persuasion and in October 2006 he was in
the new job.
Housebuilding was not a sector he knew about, but after dealing with the
thousands of complaints he received when he ran Centrica’s residential
energy business he did know how to manage a business and deal with difficult
customers.
Clare, 51, was also a man in a hurry. Just a few months after he joined
Barratt, he was negotiating one of the industry’s biggest takeovers when he
bought the rival builder Wilson Bowden for £2.2 billion in a deal
principally financed by debt.
His acquisition propelled the company into the FTSE 100 and Clare was running
his own show, ranked among the elite of Britain’s top businessmen.
It was to prove a short reign. Six months after the deal was completed, the
mortgage bank Northern Rock owned up to its financial difficulties. It gave
the first hints of cracks in the housing market and signalled that the good
times were over.
As a precaution, Clare dusted off a file at Barratt’s headquarters. The
company had almost gone bust in the last housing crash in the early 1990s
and had kept the DIY manual of how to survive a recession.
Clare opened it up, but little did he know how bad it was going to get. Since
that time the group’s share price has fallen 91% and the market value of the
combined group has collapsed from £4.4 billion to £300m. At the same time
its debts have remained stubbornly high at £1.7 billion and there are now
serious questions about the company’s future.
Clare’s career as a chief executive is probably over. Those shareholders who
have stayed the course are incensed at the way he has gambled away Barratt’s
legacy. For 20 years the company had studiously avoided mergers and
acquisitions, but now, in just one deal, Clare has nearly destroyed the
company.
How long Clare and his finance director Mark Pain remain at the company lies
in the hands of their new chairman, Bob Lawson, who joined this month and
has a reputation for rolling up his sleeves at operational level. As one
investor put it: “The answer is not very long.”
Barratt is not alone. Taylor Wimpey, which was formed out of the merger of
Taylor Woodrow and Wimpey, is in a similar mess. Its share price has
collapsed by 82% and its value has fallen from £5.5 billion to £744m. That
fall, usually seen only in high-risk technology and biotech stocks, has also
cast doubt over the future of its chief executive, Peter Redfern.
A raft of other quoted builders, including Persimmon, which has pulled off a
series of deals, are also facing challenging times. They are downgrading
their profit forecasts as margins come under pressure and they build fewer
homes. Many have stopped buying land.
Even the sector’s most experienced operators, such as Tony Pidgley, chief
executive of Berkeley Group, say it is the worst market they have
experienced. He said: “This market reminds me of the early 1970s. It’s much
worse than the 1990s. The downturn has been much quicker and sharper. In
1973, no sooner had you blinked than you were in a collapse.”
Pidgley is not alone in sharing that bleak view. Paul Checketts, construction
analyst at Oriel Securities, a stockbroker, said: “The fallout could be
worse than people have been forecasting up to now. The implication is that
the numbers are going to be worse than companies think.”
DEVON’s Cavanna Homes has been building houses since 1923 and seen more than
its fair share of economic ups and downs. However, this downturn caught its
directors, who include 85-year-old chairman Patrick Cavanna, by surprise.
Eugene Rapson, Cavanna’s finance director, said: “We initially thought this
would be a short-term correction. We thought it might be spring 2009 until
we got some improvement, but now we think it won’t stabilise until mid to
late 2010.”
Rapson argues that with low gearing of about 20%, Cavanna is well protected,
but the company is preparing to batten down the hatches. “We have five sites
that we are due to start [building] on in the next two months – but now we
are considering starting on only one of those,” he said.
It is a pattern being repeated across the country, with many companies faring
far worse than Cavanna. According to figures compiled by Begbies Traynor,
the insolvency specialist, 136 housebuilders have been placed in
administration this year, which equates to almost six a week.
Many smaller building companies are family-controlled concerns, and part of
their problem, said Nick Hood, Begbies Traynor’s senior London partner, is
“management denial”, where businesses look at the situation and think they
can “muddle through” because they have survived previous downturns. It is an
attitude, he said, that is misguided, particularly given the way this crisis
has unfurled so fast.
The upshot is that there is going to be a huge shortfall in the number of new
homes being built this year. In 2007, there were 190,000 homes built in
England, according to the Home Builders Federation (HBF), a trade body.
Estimates suggest that the figure for 2008 will be half that number and a
long way short of the government’s target of 140,000 new homes erected every
year until 2016.
This housebuilding crisis could have a longer-term impact. “If you allow the
industry to downsize to suit the current market, it’s going to take an awful
lot longer to build that back up again,” said HBF spokesman Steve Turner.
Another problem is that the economic crisis is not only affecting
housebuilders but having a ripple effect on many associated industries,
including estate agents, building-materials suppliers, subcontractors and so
on.
In Scotland, the worst of the housing crisis has yet to hit, but businesses
are putting plans in place to deal with it when it does. David Sutherland,
chairman of Tulloch, a large, privately-owned Scottish housebuilder, said he
had worked in the industry through the last two downturns, in the early
1970s and early 1990s, and thought that this time round “it is as bad as
those in parts of the UK”.
He had spent time in the company’s showrooms to get a better view of customer
concerns and is, in part, basing Tulloch’s strategy on what he learnt. The
company is developing a new mortgage product that will come with an approval
lasting nine months to give customers more time to sell their existing
properties. Its larger rival Taylor Wimpey is also using big incentives to
drum up custom. It is offering homebuyers a quarter of the value of a new
home interest-free for 10 years.
“People want to move, but they can’t get a mortgage and they can’t sell their
houses,” said Sutherland.
WHEN Barratt’s Clare was in the closing stages of negotiating the Wilson
Bowden takeover, he was interrupted by a power cut at his London base and
had to jump in a car to dash to the London headquarters of his adviser, UBS.
He may now wish there had been a power cut there as well. This is not a deal
from which anyone has emerged with glory. Even David Wilson, the founder of
Wilson Bowden, has shared the pain. In the cash-and-shares deal, he took
£190m in cash, but he also took £243m in shares, which are now worth less
than 10% of the original value.
However, Clare thinks the City has panicked in marking down Barratt’s share
price. He said the present share price reflected an Armageddon scenario,
something that was very unlikely. “It has been completely overdone,” he said.
He has some supporters. Gary Channon of Phoenix Asset Management, which has
built an 8.4% stake in Barratt in recent weeks, said: “We have a high degree
of confidence in the management team and believe that they are focused on
generating long-term returns for shareholders. We also believe that Barratt
has one of the best operational managements in the business with lots of
experience of handling cyclical market conditions. In other words, we think
they have strength in depth.”
This chimes with what Clare is trying to do – “to drive costs down, drive the
working capital, and focus on selling”. Barratt has also put a block on land
purchases and believes it can cut group debt to a more manageable £1.2
billion by the end of the 2009 financial year. Clare is predicting a 10%
fall in house prices this year and between 5% and 10% for next year.
Because of Barratt’s dire financial position, he has been forced to say in
public what he is doing, but you can bet that every other housebuilder is
doing the same thing.
Big redundancies are inevitable. In the last recession, in the early 1990s, it
is estimated that about 500,000 people directly employed by the
housebuilders lost their jobs. For the past decade the housebuilding sector
has tried hard to repackage itself as a disciplined industry that is no
longer characterised by boom and bust cycles. That claim has proved to be
invalid. This cycle has proved yet again that the best leaders of
housebuilders are entrepreneurial founders who can predict trends. That is
why the best ones, like Steve Morgan of Redrow and Alan Cherry of
Countryside Properties, sold out in the past few years.
The big issue now is how quickly the sector will recover and, as Berkeley’s
Pidgley said: “This may come out the other side as quickly as we went in. By
next spring the mortgage banks will be lending again.”
That is why Pidgley wants to get consent from his investors to buy back
shares. The problem for him is that by the time he gets it, the opportunity
to capitalise on historic low prices may be over.
HOW THE GIANTS HAVE FARED
PERSIMMON
Pretax profit, 2007: £582.7m Landbank: 89,987 plots Houses sold, 2007: 15,905
Net debt: £1 billion Market value today: £1.2 billion Market value at peak:
£4.6 billion
BARRATT DEVELOPMENTS
Pretax profit, 2007: £427.8m Landbank: 109,700 plots Houses sold, 2007: 17,168
Net debt: £1.7 billion Market value today: £299.9m Market value at peak:
£4.4 billion
TAYLOR WIMPEY
Pretax loss, 2007: £19.5m Landbank: 86,155 plots Houses sold, 2007: 14,862
(UK) Net debt: £1.9 billion Market value today: £744.2m Market value at
peak: £5.5 billion
