Was Miller right to sell its construction business?

By all accounts Galliford Try appeared to get a very good price for Miller Construction, a £17m price tag for a company with £23m of cash on its books. It’s an example of what can happen when you have a (very) willing seller and a buyer that is good at hiding just how willing it is.

Morrison’s apparent willingness – some might say urgency - stems from its putative intention to float as a purely housebuilding business. Any thought of carrying a mucky, risky construction business might dilute the valuation or put off some potential investors altogether.

It brings to mind the situation when US housebuilding giant Centex sold its construction business to Balfour Beatty in 2007 for $362m, with $200m of cash coming with the business. The need to sell was great; the reason different. Centex at that time was struggling in the midst of the huge housing recession and needed all managerial hands on deck. Having played second fiddle to the housing arm for years, the construction business, which turned over $1.6bn, appeared to be very happy to move to a fellow contractor. It looks to have been one of Balfour’s success stories. (The partnership has not been so enduring with Balfour’s other US acquisition, Parsons Brinckerhoff.)

The question is whether Miller Group’s timing is as auspicious. Shares in the top five housebuilders have fallen by around a fifth over the past five months

Galliford seems to have played its cards well, walking away from the deal twice, according to Building. The timing looks pretty smart – just when construction shows all the signs of an impending strong recovery.

The £410m a year business made a loss of £4.6m last year, mainly on a handful of contracts. Assuming a not over-demanding 1% margin and 20% tax rate, even without excluding the cash, the £16.6m price tag implies an apparently cheap price earnings ratio of a tad over 5x for the 700-strong company.

With industry volumes on an upwards trajectory, one would presume the cash pile could grow further – as is normally the case for contractors in up cycles. The attractions for GT included Miller’s success in big frameworks, such as health and defence. While acquiring construction companies always carries risks, Galliford has a good record in this regard. Its 2006 acquisition of Morrison Construction has taken the group from strength to strength in Miller’s home market of Scotland.

The question is whether Miller Group’s timing is as auspicious. The latest round of housebuilder trading statements painted an ecstatic picture looking back over the past six months. But concerns have been mounting since February as to how sustainable the housing market recovery is. Shares in the top five housebuilders have fallen by around a fifth over the past five months as a cocktail of regulatory, lending and political incursions have unnerved investors.

I can’t argue with the observation in by Cenkos’s analyst Kevin Cammack: “If [Miller Group] don’t manage to get the float away it will be terribly embarrassing”.

Alastair Stewart is building analyst at Progressive Equity Research. Follow him on Twitter @BuildInsight