Wimpey and McAlpine set to join house with £450m merger deal

Housebuilders rush to get bigger in attempt to improve margins amid signs the sector could soon face difficulty

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Merger and acquisition activity in the housebuilding sector is back on the agenda following news that George Wimpey is at an "advanced stage" of talks to buy Alfred McAlpine's housebuilding division. The two groups may announce a deal as early as today when McAlpine reports its half-year results.

Analysts were surprised at the timing of the deal, details of which emerged just days after Wimpey's chief executive, Peter Johnson, denied that the housebuilder was considering such a move. Instead, many thought Mr Johnson would be better off showing he could build on the foundations he has laid since joining Wimpey last October.

Wimpey's rationale for buying McAlpine's home construction unit, which analysts predict could cost more than £400m, lies in Mr Johnson's desire to boost Wimpey's position in the higher priced market, particularly in London and the South-east.

Speaking at the company's interims earlier this week, he said: "Our strategy is to seek opportunities to improve operating margins, to gain further benefits from our scale and to increase our exposure to higher margin markets." Wimpey's average selling price of its homes in the first half was £118,000 compared to a UK average of £135,000.

Stephen Rawlinson, a sector analyst at Peel Hunt, the stockbroker, is sceptical that the deal will provide the desired fillip for Mr Johnson. "McAlpine's geographical spread has a northern bias, which isn't really what Wimpey needs. The problem is that both companies work as short-term landbank operators," he said. The three-year landbank cushion is not enough to help either party improve profit margins from about 10 per cent at Wimpey and 12 per cent at McAlpine compared with the industry average of around 16 per cent.

Both parties remained tight-lipped. McAlpine, which was founded by two brothers in 1935, has wriggled out of three takeover approaches in the last 18 months, the latest of which came last December from Heron International.

In a statement issued yesterday, the companies said: "The consideration is expected to represent a premium to net asset value and would be payable in cash partially on completion with the remainder deferred." This could push Wimpey's gearing up past 100 per cent. It shares slipped 0.5p to 194.5p, while McAlpine's soared 16 per cent, up 53p to 391.5p.

If successful, the divestment would pitch McAlpine as a support services company following its £52.2m acquisition of Kennedy, the utility services provider, in March. This should please investors, who have been unhappy at McAlpine's dual focus on construction and housebuilding, which has caused its shares to trade at a discount to others in the sector.

Industry insiders expect this week's takeover talks to start the consolidation ball rolling once more in the housebuilding sector. In January, Persimmon leapfrogged Wimpey to become Britain's biggest housebuilder when it scuppered a £1bn merger between Bryant and Beazer by buying Beazer. Bryant was later bought by Taylor Woodrow.

John White, chief executive of Persimmon, said: "This is the way the industry is going." He expects to see the 22 specialist housebuilders currently quoted, most of which have relatively small stockmarket capitalisations, pared down. "We'll see perhaps five or six large developers emerge over the next five years, doing anything from 13,000 to 20,000 units [a year]. People doing 3,000 to 5,000 units will be taken over or will get together themselves."

Mr White being bigger will make it easier to beat planning constraints, to achieve synergies and to source land. "Land owners recognise the advantages of dealing with large, national companies who offer a good track record and all the various skills needed [to develop it]. Small regional players find it hard to identify land," he said.

Since taking over Beazer, Persimmon has increased its estimate of annualised cost-savings from £20m to more than £33m. Taylor Woodrow told shareholders at its annual meeting that it expected to deliver £15m of synergies in the combined operation's full year of trading. And in a similar vein, Mr Johnson has squeezed £20m of savings from restructuring Wimpey's British operation by merging its McLean Homes and Wimpey Homes divisions.

Simon Brown, an analyst at Williams de Broe, questioned whether combining Wimpey and McAlpine's housebuilding divisions would create the desired synergies. "There may be problems with trying to link two relatively large companies that don't overlap in product styles," he said. Another analyst, who did not wish to be named, said: "The deal is more about Wimpey trying to make sure it is the biggest housebuilder [than synergy benefits]."

The combined company would have a stock market value of more than £1bn and would build around 14,000 units a year.

Although Wimpey has dabbled in urban regeneration, it will benefit from McAlpine's strength in developing urban sites. The Government target is for 60 per cent of all additional housing to be built on previously developed land by 2008. Last year, it managed 57 per cent. It actively discourages building on greenfield sites, following a policy of "presumption against inappropriate development".

With the Nationwide Building Society warning earlier this week that house prices are rising at "unsustainable rates", the run enjoyed by housebuilding stocks since the consolidation wheel started turning seems bound to falter. "Everyone is expecting some sort of meltdown in house prices," Mr Rawlinson said. "If that happens, margins will suffer." Which could be a further spur for smaller players to start moving.