Tarmac swaps houses for roads

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The Independent Online

Deputy City Editor

The long-awaited consolidation of the troubled UK building industry was kick-started yesterday by the unexpected announcement that Tarmac is to swap its house-building operation, Britain's second largest, for Wimpey's construction and minerals activities.

The City welcomed the deal, with Tarmac's shares closing 10.5p higher at 93.5p, a 13 per cent rise. Wimpey was marked 15p higher at 127p, a similar increase. Both shares have under-performed sharply over the past year as trading conditions have deteriorated.

Following the deal, Wimpey will dominate the UK new-house market, building an estimated 15,000 houses a year. Joe Dwyer, the company's chief executive, said Wimpey had targeted 20,000 houses a year after expansion of its operations in the US and Australia.

Tarmac becomes Britain's leading road-builder and aggregates producer, generating substantial asset backing for what is expected to be a leading role in the Government's private finance initiative. Industry observers believe the PFI will be dominated by large, financially strong companies.

Both companies described the asset swap, which puts a value of about pounds 320m on Tarmac's housing operation, as a "win-win situation". Tarmac signalled in August that it planned to withdraw from house building, but yesterday's deal confirmed that neither company could continue to fund expansion of a range of businesses and would need to focus on only one of their existing divisions.

By swapping assets in this way, the companies avoid accepting a discount to underlying value in the disposal ofunwanted divisions, and the need to pay a premium when the funds raised are reinvested.

Neville Simms, Tarmac's chief executive, said the deal answered criticisms levelled in August that the sale of housing would fail to achieve asset value, that Tarmac would be unable to reinvest the funds effectively and that earnings per share would be diluted. The deal was confirmation of his confidence in the long-term future of the construction industry, which has been plagued by overcapacity and low demand.

Analysts welcomed the deal but some expressed concern over the large cash demands Wimpey would face running a house-building company with a land-bank of more than 30,000 plots. Mr Dwyer expected to spend in excess of pounds 200m a year simply replacing the land consumed by new houses.

Wimpey estimates that it will control about 10 per cent of the UK's new- build housing market following the merger. Barratt and Beazer, the next largest rivals, have market shares of only about 4 per cent.