Berenberg downgrades Redrow on limited upside

Berenberg has cut its rating for housebuilder Redrow from 'buy' to 'hold' following the company's announced merger with Barratt Developments.

Under the terms of the deal announced last month, Redrow shareholders will get 1.44 Barratt shares for each Redrow share. At the time, Barratt's share price was 530p with the offer for Redrow at 763p per share, implying 1.2 times tangible net asset value (TNAV).

"However, with the recent decline in Barratt’s share price the offer for Redrow now stands at 688p per share (implying a 1.1x TNAV)," Berenberg said. "Given our view that the merger will complete as planned and reflecting the current Barratt share price, we update our price target and rating for Redrow."

The broker has lifted its target price for Redrow from 643p to 688p, implying very little upside from the current price, down 1.3% at 658.5p by 0914 GMT.

As for the rationale of the merger, Berenberg said: "Barratt and Redrow have promoted the benefits that will flow from the proposed merger in terms of product, brand, synergies and balance sheet. We suspect that expanding its landbank was also an important driver for Barratt, while Redrow’s shareholders have the benefit of either crystallising the 27% premium offered (as on the day of offer) or remaining shareholders in the combined entity, where we are confident the synergy target of £90m will be achieved."