Barratt Earnings: Mooted Merger With Redrow Has Appeal Contrary to Negative Stock Price Reaction

We lift our fair value estimate for no-moat Barratt Developments by 6% to GBX 740 following the announcement of its proposed merger with peer U.K. homebuilder Redrow. The mooted deal—the announcement of which overshadowed Barratt Developments’ first-half fiscal 2024 result—promises to deliver a clear leader in the U.K. homebuilding industry, with an estimated market share of around 10% based on home completion volumes. The deal offers strategic cogency and cost synergy benefits. Consequently, we fully expect the deal to ultimately proceed, despite being subject to approvals from Barratt and Redrow shareholders, as well as U.K. antitrust regulatory clearance. With shareholder voting likely to proceed in May 2024, the deal is expected to be completed in the second half of 2024 (calendar year). Barratt’s stock price dropped 5% in response to the merger announcement, with investors ostensibly concerned that synergy capture may ultimately prove more elusive than management’s expectations under the deal. We think investors’ concerns surrounding synergy realization are overblown and view Barratt shares as attractive, trading at a 32% discount to our revised fair value estimate.