By Suban Abdulla and Aby Jose Koilparambil
(Reuters) -Britain's biggest homebuilder Barratt has agreed to buy smaller rival Redrow (LON:RDW) in an all-stock deal valuing it at about 2.52 billion pounds ($3.18 billion) as it looks to capitalise on a fledgling recovery in the housing market.
The takeover follows affordable housing-focused builder Vistry's pruchase of rival Countryside for about 1.25 billion pounds in 2022.
The newest combination, to be named "Barratt Redrow", aims to deliver more than 22,000 homes each year in the medium term, or 57% to 63% more than the 13,500 to 14,000 deliveries Barratt expects to deliver by itself in fiscal 2024.
Redrow's shares, which have fallen about 30% from all-time highs hit in 2020 jumped 12.7%, while Barratt's stock fell by more than 7%.
Under the terms of the deal, backed by the boards of both companies, each Redrow shareholder will get 1.44 new Barratt shares for each share they hold. Barratt's shareholders will own about 67.2% of the combined group.
Barratt expects the deal to add to earnings in the first year after the transaction closes and to save at least 90 million pounds on an annual run-rate basis by the end of the third year.
British housebuilders have struggled for the past couple of years as high interest rates dented demand and building costs rose. However there have been signs of stabilisation in the wider housing market, including a rise in home prices last month, spurred by cheaper mortgage loans.
Barratt CEO David Thomas, who will lead the combined company, said there had been some improvement in demand at the start of 2024, helped by expectations of lower interest rates.
The Bank of England is likely to start cutting rates later this year and there have been signs of growing confidence in the construction sector.
Executives with house-builders have said a full recovery will also require reform of Britain's often complex planning system which can delay projects.
Thomas urged the leaders of Britain's ruling Conservatives and the opposition Labour Party - which is currently ahead in opinion polls - to come up with specific proposals as part of their plans for a national election expected later this year.
"I think both parties recognise that as a country, we're simply not building enough homes. We expect that (they) will feature housing heavily within their manifestos," he told Reuters.
Last month, rival builders Taylor Wimpey (LON:TW) and Persimmon (LON:PSN) expressed cautious optimism about demand improvements but stopped short of a firm outlook.
"The economic winds have not been kind to the housebuilders and Barratt Developments (LON:BDEV) and Redrow clearly believe they'll be stronger together, giving the new combined company much bigger clout to capitalise on the structural need for housing in the UK," said Susannah Streeter, head of markets at Hargreaves Lansdown (LON:HRGV).
Thomas said that the group would bring a "full geographical footprint across the UK", with Barratt Homes catering to first-time buyers, its David Wilson brand building larger homes, and Redrow serving premium purchases.
($1 = 0.7934 pounds)