Could Dubai save Barratt Developments from disaster?

There is a strong sense of deja-vu about the UK house builders plunging share prices. The same thing happened in the early 90s when I was Business Editor of the industry’s trade magazine Building.

The main difference is that then the construction analyst leading the pack was old Angus Phaure of NatWest, today it is Alastair Stewart of Kleinworts, my old colleague from Building magazine. He took over my job when I left and has since made it up the greasy pole in the City.

I can remember the price of Barratt Developments falling to 33p in 1991 and ringing Angus Phaure to ask if the company was still a buy. He thought Barratt a ‘screaming buy’ as this house builder was not about to go bankrupt and losses were accounting write-downs only.

Not so this week, my old friend Alastair who bought me dinner in Dubai last summer while on an analysts’ jolly says that Barratt is in really deep water this time. He told the Daily Telegraph: ‘With the share price falling with seemingly no means of support, we’ve withdrawn our target as we cannot gauge the dilution of a financial rescue package – nor the chances of one being supported.’

He said even a debt-for-equity swap would be hard to pull off: ‘Would a debt-for-equity swap by Barratt’s banks be supported? There are two concerns: the level of potential writedowns possible and, more recently, the changing banking environment.’ A deeply discounted rights issue also looks impossible.

Barratt’s shares collapsed 29p to 91p and Alastair withdrew his target price on Barratt in a note entitled: ‘Don’t buy [at any price].’ The once high flying group spent $4.5 billion last year taking over rival Wilson Bowden and now has a market value of less than $650 million.

If I remember correctly from the early 90s what comes next is a massive round of land write-downs from the UK house builders which accounting conventions demand must mark land to market prices. That is clearly a big issue for Barratt which has obviously hopelessly overpaid for Wilson Bowden whose canny former family owners must be smiling on a tropical island somewhere, although sadly they did take half the payment in Barratt shares.

Will a sovereign wealth fund or private equity concern bail Barratt out? If I was running a Dubai or similar fund this would be something I would look at. You would want to let the crisis run its course to get the best price but not let the company end up in the hands of the receiver.

On the other hand, premature house building acquisitions can be fatal in a falling market. I recall how Raine Industries bought rival Walter Lawrence too early in the 90s debacle and is no longer with us.

In the 1991 I challenged Barratt founder Sir Lawrie Barratt to buy his own stock at 33p as a mark of confidence when he returned from retirement to save the company. He bought $2 million worth and made another swift fortune out of my cheeky article as the group later recovered. At 80 he is probably now too old to make another comeback but I would not rule it out. Perhaps a Dubai fund should sound him out.