HBOS considers cutting McCarthy & Stone stake

HBOS is understood to be considering selling part of its 58% majority stake in retirement homes builder McCarthy & Stone as it closes in on £2.17bn (€4.1bn) house builder Wilson Bowden.

An investment vehicle ‘Castle Bidco’ comprising HBOS and Sir Tom Hunter’s West Coast Capital is expected to enter exclusive talks with Wilson Bowden this week unless rival bidders Barratt or George Wimpey can match or top its £2.17bn (€3.23bn) offer, although a source close to the deal said offers were at this stage ‘indicative not conditional, there is a lot more work to be done’.

It is understood that Wilson Bowden founder and chairman David Wilson’s preference is for an all-cash offer due to his impending retirement, favouring the HBOS bid.

It is highly likely that HBOS will then seek to reduce its exposure to the property sector by selling some of its 58% stake in McCarthy & Stone, which HBOS, West Coast Capital and the Reubens brothers’ Augusta Capital acquired last October, successfully outbidding Permira and Barclays Capital in a £1.1bn (€1.7bn) transaction. HBOS is also working with Hunter on its recommended £713m offer for property developer Crest Nicholson.

Property entrepreneurs Vincent Tchengquiz and Nick Leslau have been mooted as potential buyers of HBOS’s stake. Tchenguiz was initially involved in the bidding for McCarthy & Stone, but signed an agreement last September with HBOS and West Coast Capital to buy the ground rents and house manager income stream on developments completed by the first anniversary of the completion of the offer in return for not making or supporting a competing bid.

Reports have suggested that a decision regarding Bowden could come as early as this Friday (February 2nd) but a source told IFR Buy-outs Europe that it is likely to take a lot longer than this.

Since last month, analysts have been keenly examining the relative merits of the three bidders. Barratt, the UK’s second largest house builder was initially seen as the favourite to take over the company. It is keen to leapfrog over the biggest builder Persimmon into the FTSE 100 and after 14 years of organic growth has a level of gearing (17%) so low that its city advisers have been encouraging it to take on more.

Mark Clare, chief executive, admitted to reporters after a trading statement: “We can’t ignore the fact that this is a

market that is clearly starting to consolidate. As a company with capability both financially and operationally we can’t just sit back and watch that happen around us. But the rules are very clear – we only do that if there’s value for our shareholders.”

Barratt’s only weakness appears to be that it will not overpay for Wilson Bowden. Given that the sector norm for acquisitions has in the past been in the range of 1.3 times book value, Wilson Bowden’s multiple of 1.85 times makes it quite expensive. However, both the done deal for McCarthy & Stone and the potential deal for Crest Nicholson were around the 2.2/2.3 times mark.

Wimpey is seen by analysts as enthusiastic to buy Wilson Bowden because it wants to improve its landbank, which is not as well thought of as that of stronger players such as Persimmon, Bellway and Wilson Bowden.

The dark horse is HBOS/Sir Tom Hunter. But the private equity team has already landed a big fish by snapping up McCarthy & Stone last Summer and before Christmas tabled a 585 pence bid for Crest Nicholson, although this was promptly rejected it proves the consortium has serious eyes on this sector.