Buy-outs building in the housing trade

It is now highly fashionable to take quoted companies private. Buy-outs come with almost monotonous regularity, with what are seen as undervalued old economy shares attracting the attention of company directors and the inevitable venture capitalists.

It is now highly fashionable to take quoted companies private. Buy-outs come with almost monotonous regularity, with what are seen as undervalued old economy shares attracting the attention of company directors and the inevitable venture capitalists.

Deals are also more ambitious. Property group MEPC has collected a £3.5bn offer and there is talk of Footsie constituent Rentokil Initial (now worth around £3.8bn) and leading midcapper Whitbread (£2.9bn) being removed from the list of quoted companies.

But in the main it is down among the small caps - so beloved by private investors - where much of the buy-out action is. The new-style privatisations embrace brewers, engineers, properties and, not surprisingly, deeply depressed house builders.

These deals can be a mixed blessing for small shareholders. I suspect they often lose out. In a management buy-out the directors should know, better than most, what is going on. Whether they are capable of putting a sensible valuation on their shares is another matter; it is rare to find a boardroom executive who thinks his shares are over-priced.

But the venture capitalists who bankroll these deals have no difficulty alighting upon realistic price tags; they do not pretend to be other than hard-nosed number crunchers, devoid of sentimentality.

So when managers and venture capitalists combine to take a company private it is, as they used to say in the City, all Lombard Street to a China orange that they believe they have struck a bargain. Whether their valuation meets the approval of outside shareholders is another matter. But at least they are given the opportunity to turn paper into hard cash and exit what may be seen as a dull investment. Shares selling at below-asset values with rock-bottom ratings are tempting candidates to be removed from the quoted ranks and housebuilders, where trading conditions are still favourable, are in the front line.

Among those already targeted are Fairview and Linden, both housebuilders. Ward is another prepared to sacrifice its quotation. It has received a £34.2m management buy-out at 65p a share but as The Independent reported last week the terms have not been widely acclaimed.

I suspect the building buying spree will continue as more managements, with their backers, take advantage of derisory share ratings, almost the lowest in the stock market.

Two shares appeal to me. One is Galliford, a member of the no pain, no gain portfolio; the other is Bellway. Both seem to be trading well and yet are on exceedingly low ratings. I have drawn attention to Galliford before, so I will not bore you by discussing its merits again. But I feel it is worth commenting on Bellway which is expected to lift profits from £68.2m to around £80m in the year ending next month. The shares, at 282.5p, are consequently selling on not much more than five times projected earnings - even below the depressed building sector average.

They do not deserve such rough treatment. The group has splendid management and an impressive profits record. Like others in the industry, Bellway has been hit by the move to higher interest rates although there is a body of opinion believing dearer money will actually be beneficial to housebuilders, reducing the danger of the boom-to-bust cycle.

Bellway is selling more properties - at higher prices - and has an impressive forward order book. It also has an extensive land bank, much of it already enjoying planning permission.

The shares were as high as 440p last year; at least one analyst believes they should now be around the 380p mark.

Housebuilders are no strangers to the violent swings in stock market moods. They often experienced volatile treatment.

Bellway - and others - could soon find themselves much more appreciated, particularly as more builders fall to takeover bids. And who knows? Perhaps Bellway is on its own management's hit list.