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Are we heading for a housing oligopoly?

by mel starrs on April 5, 2007

in Uncategorized

Not often I get to use the word oligopoly , but with regards to current movements in the housing market, it seems appropriate. Great article here from Mark Leftley:

…we now have a big three, firms that can only get stronger. In the FTSE-100 companies have access to tracker funds, meaning that it is far easier for them to raise extra finance. The cost savings they will generate through redundancies and merging operations will mean that they can prove their financial prudence to lenders, who will happily throw them cash given the seemingly endless price boom.

The big 3 in question are Persimmon (already on the FTSE100 – PSN), Barratt (BDEV – FTSE 250) and the potential Taylor Wimpey (Taylor Woodrow – TWOD – FTSE 250) (Wimpey – WMPY – FTSE 250). Kotler ‘s rule of thumb is that a bigger market share can lead to a bigger profit for a company up to a ceiling of 40%. Companies with market shares of less than 10% have little influence on price changes, new services and promotional intensity. The top 4 companies accounted for almost 50% of the market in 2006 (48%), each being between 10% and 13.5%, meaning a true oligopoly.  However, even with Taylor Wimpey combined, we’re looking at 25% – no individual company would be near the ‘danger’ mark of 40%.

I’ve just been trawling through data from Building’s housebuilders league table for 2006. This graph shows why Barratt and Taylor Wimpey are keen to follow Persimmon into the big league:

Housebuilders

click to enlarge

The pink line is the profitability, ranging from over 38% for McCarthy Stone to only 10% at the other end of the market. Note Persimmon are sitting on 23.1%, significantly more than Barratt (16.4%), Taylor Woodrow (15.7%) and Wimpey (14.6%). The blue bars are turnover (look at what’s going to happen if Taylor Wimpey is pulled off – likely to be more than double the next two rivals combined).

Whilst shareholders might be delighted with the increasing price of shares following the news, it’s worth remembering that mergers are not always as successful as they could be (Tichy, 2001:

no more than a quarter of the mergers increase consumer welfare; another quarter increase profits at the cost of consumers; half of the mergers reduce the value of the firm. Targets’ shareholders win, while bidders’ shareholders break even upon the announcement of a merger, but lose significantly in the long run. Seen relatively, horizontal mergers fare best, especially if they are focus-increasing. Cash-financed mergers fare better than stock-financed and strategic mergers fare better than financial ones.

At this point, I would have loved to have been able to say that going green is more profitable. IMO, Crest Nicholson are one of the ‘greenest’ major housebuilders. Disappointingly, although listed in FTSE 250 too, last year’s profits were only 13.3%.