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June 11, 2008

Barratt Developments in crisis as share price plummets

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by Brian Turner

Barratt Developments in crisis as share price plummets

Barratt Developments, the company behind Barratt Homes, is facing a crisis as its share price went into freefall today.

At the opening of January 2007, share prices for BDEV – the company ticker on the London Stock Exchange – were 1266p per share. At the time of writing, they have become worth only 53 pence.

While the existing downturn in the property markets is certainly bad news for home builders in general, Barratts remains specifically exposed to fall out from the Credit Crunch.

This is not least because of its buy out of builders Wilson Bowden last year for £2.2 billion, which has saddled Barratts with massive debt at a time when credit conditions have become adverse.

Wilson Bowden is already suffering problems with their development schedule, not least the massive regeneration of Southampton’s docklands at Ocean Village.

The company has halted work at Admiral’s Quay, leaving only three of the planned five blocks planned as built, and only two of the tenshops and bars completed.

Commentators see the move as caution in the face of concerns about long-term demand in the face of over-supply.

Barratts has already issued a profit warning earlier in the year over falling sales, but now faces an uncertain future because its market capitalisation of just over £200 million is far below its debts of £1.7 billion.

While Barratts could follows the capitalisation path that a number of UK banks have followed, the tenuous position of the Barratt’s balance sheet may mean raising capital proves difficult at best.

The company could be forced to sell existing land holdings and developments, which in conjunction with a falling property market could help glut land inventories for sale and reduce the price of land further, and further impact the price of individual developments for sale.

What complicates the matter further is that hedge funds are aggressively shorting shares in UK house builders – borrowing shares from pension funds, and then hedging price falls, and returning the shares after a tidy profit is made.

Similar actions were believed to have hastened the demise of Northern Rock.

In the meantime, the short-term future of Barratt could be bleak indeed, unless private equity views the company as a bargain and seeks to develop its long-term future.


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