Redrow share offer falls short on profit worries

THE MARKET'S lack of appetite for the housebuilding sector, and new issues generally, was confirmed yesterday by the failure of Redrow to attract takers for the public element of its placing and open offer.

Applications were received for only 17 million of the 21.8 million shares on offer, despite the scaling back of the planned proceeds when it was priced two weeks ago.

Steve Morgan, chairman, who received pounds 62m from the flotation, said he believed raising pounds 23m from the retail portion of the 135p-a-share offer was creditable in current market conditions.

Dealing is expected to start on Tuesday when investors will discover whether Redrow mirrors the poor market debuts of rivals Beazer and Wainhomes. Beazer's shares, which closed yesterday at 158p, were placed at 165p. Wainhomes' shares, 154p, were originally priced at 170p.

Advisers to the issue blamed the market's weariness with new issues, but Redrow also suffered from increasing worries about the future profitability of housebuilders whose margins are under pressure from fast- rising land values, increasing labour and materials costs and only slowly improving house prices.

Earlier this week, Prowting warned that the industry's house price inflation expectations were too optimistic. It said the prices being paid for land by some builders were likely to cause problems in two or three years.

The realisation that it had missed the boat as far as maximising the float's proceeds was concerned had already forced Redrow to reduce its planned market capitalisation from about pounds 350m to pounds 298m in the run- up to pricing the issue.

Steve Morgan, who founded the company 20 years ago with a pounds 5,000 loan from his father, originally stood to take pounds 100m out of the business, reducing his stake from 98 to just over 50 per cent.

Faced with a lower market value, he decided to keep 60 per cent of the shares, worth pounds 179m at the flotation price, and take only pounds 62m as cash.

The failure of the public element of the offer underlined the difficulties of pricing a stock market flotation in uncertain markets. Many analysts believe Redrow is one of the best housebuilders in the industry, but it failed to attract buyers despite being priced more cheaply than most of its peers.

On a prospective price/earnings ratio of 17, Redrow was pitched less aggressively than five rivals - Wilson Connolly, Wilson Bowden, Bryant, Persimmon and Berkeley - which trade on an average of 19.3 times expected earnings in the year to June.