It was back in July we learned that David Wilson was undertaking one of his periodic rethinks of his personal financial position. From then on, it was possible that Wilson Bowden, the housebuilder he founded, would end up being taken over. Much depended on whether Mr Wilson would agree to the sale of the 33 per cent stake he controls. But if Mr Wilson decided it was time to diversify, his goal would very likely be achieved by a sale of the whole firm.
When in September it was revealed — in the pages of this newspaper — that HBOS, the bank, was interested in buying, the odds that Wilson Bowden would lose its independence shortened.
It is now a racing certainty that the housebuilder will be bought. The more difficult question revolves around the price that will be agreed.
There was a time when housebuilders were valued at or even below net asset value. Construction skills were deemed worthless and the perceived cyclicality of the residential housing market meant the only asset of note — land — could not be relied on to be worth even what the book valuation indicated.
As it became more difficult to obtain planning permissions for land, investors began to add value to housebuilders for their ability to negotiate for permissions, and for their ability to buy land with realistic planning prospects. As a rule of thumb, housebuilders’ shares were then valued at a premium to net asset value of about 1.3 times.
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Then the financial buyers emerged. They, blessed with the capacity to borrow more aggressively than quoted housebuiders, benefited from access to cheaper capital. Financial buyers may also be prepared to pay more because they had a rosier view of the outlook for residential house prices.
McCarthy & Stone, the retirement apartments specialist, was taken out for the equivalent of 2.2 times its net asset value. Meanwhile Crest Nicholson, now being stalked by a consortium including Sir Tom Hunter and HBOS, is not far behind.
Shares in Wilson Bowden currently trade at £20.98. They would be worth at least £25 if the company were to fall for a bid at 2.2 times net asset value and might go for as much as £27 if likely near- term growth in NAV is factored in. So although shares in the company were the highest climbers in the FTSE 350 index yesterday (they rose 15 per cent) and have all but doubled in value in the past year, they might have still further to go.
That said, it is trade rather than financial buyers who have registered the keenest interest in Wilson thus far. A rival housebuilder — be it Wimpey, Redrow or Bellway — might find it harder to make numbers including a 2.2 NAV multiple stack up.
Indeed, a trade buyer might be stretched to justify paying 1.8 times NAV: and yet that is what the current price of £20.98 equates to. Hold in the hope, rather than the expectation, of a little extra.
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Mitie
The acquisition of a manned security guard business from Rentokil Initial made results posted yesterday by Mitie, the support services group, look exceptional. Sales rose 30 per cent and operating profit climbed 28 per cent, but while the deal played an important part in the performance, Mitie did more than buy success. Underlying organic growth in sales and profits grew at about 11 per cent in the six months.
Demand for the kind of maintenance services offered by Mitie continues to grow, largely because clients continue to be attracted by the notion of outsourcing ancillary activities. Mitie’s decision to cross-sell is also paying off. Some of the cleaning contracts are turning into cleaning and heating engineering contracts.
Mitie has to prove that it can integrate the Rentokil acquisition without mishap. Profit margins have thinned as a consequence of the deal and, although the company is confident that it can rectify the position, it is easier to give assurance than deliver. Yet the 26 per cent rise in the dividend gives investors ample reason to give the company the benefit of any doubt. Buy.
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Trinity Mirror
At first glance, Trinity Mirror, the regional and national newspaper group, looks cheap. With Sly Bailey conducting a review of strategy, the hope is that the chief executive may consider an auction of the company or perhaps break the business up. After all, with the shares trading at 11 to 12 times earnings, by media standards Trinity’s valuation is modest.
Unfortunately, it is no foregone conclusion that the company will be broken up. Trinity Mirror’s market value is £1.45 billion, but there is debt of £500 million and a pension fund deficit of £233 million to take into account. The total enterprise value is about £2.2 billion.
So what is it worth? Daily Mail and General Trust struggled to get an offer of about £1.1 billion for its regional newspaper arm; Trinity Mirror’s is 20 per cent more profitable, so it may fetch £1.3 billion. Meanwhile, the last known bid for the Racing Post was pitched at £210 million nearly two years ago. That leaves the Daily Mirror and the other national titles, including the Daily Record. Marcus Evans has mooted £550 million to £600 million for the Mirror, but it is not certain if the Record is included. Even if it is not, the company would do well to fetch £100 million.
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That makes an uncompelling case for the shares at the current price and a bid for the whole group is unlikely to be much more exciting. Unless there is a trophy buyer. Hold.