The player king

Sir Tom Hunter, serial investor, well-known philanthropist and arriviste housebuilder, is fond of quoting his hero Andrew Carnegie when he speaks in public. Carnegie, who left 19th century Scotland for America at the age of 14, penniless, before becoming the richest man in the world, said: “The man who dies thus rich dies disgraced.”

Like his hero, Hunter has given away large chunks of his substantial fortune, lavishing millions of pounds on a wide variety of philanthropic projects and along the way made friends with Bill Clinton, Bono and Bob Geldof. He has even said that he and his wife will “leave this world as we came into it, with nothing”.

But there are many who believe his much publicised philanthropy is now extending to the prices he is paying for housebuilders. In the past six months Hunter and his principal partner in these deals, Edinburgh-based bank HBOS, have paid top dollar to establish a foothold in the industry; £1.1bn for McCarthy & Stone and £713m for Crest Nicholson. Hunter and HBOS may have suddenly balked at forking out too much for Wilson Bowden earlier this month, but the City thinks they are still in the market for another housebuilder and are not shy about flashing their cash.

Hunter’s dramatic gatecrashing of the sector has left some in the City confused. One analyst said: “I’m sure he has fans in other industries, but not many people in the sector know the man. What we do know is he has paid a high price for what he has got so far. McCarthy & Stone went for around twice its asset value based on plots.”

Analysts also point out there is no obvious synergy between McCarthy & Stone, a retirement home specialist and Crest Nicholson, a large chunk of whose work is urban regeneration projects. Cost-cutting potential via a merger is unlikely.

Of course, private equity firms tend to focus on the exit. Consequently speculation is rife that Hunter and HBOS are looking to develop land banks quickly and sell homes without adding significantly to the land bank. This offers the opportunity to make a reasonably fast return on their investment but clearly is not a strategy geared for a long-term future in the sector. That said, the day after it emerged that HBOS was looking to dispose of a large chunk of its holding in McCarthy & Stone, insiders at West Coast Capital insisted Hunter was “a long-term holder”. However, it is worth noting that the lifetime of the current land bank of McCarthy & Stone and Crest Nicholson is three and five years respectively. In private equity terms half that time span is considered long term.

Crest of a wave

There is an alternative school of thought that Hunter has identified urban regeneration, which of course Crest specialises in, as a strong profitable growth sector. “Traditionally housebuilders haven’t always been great at pulling together the kind of mixed-used developments required for regeneration schemes where you need retail, leisure and commerical property elements,” commented another analyst. “This could be Hunter’s niche as those sectors are where he made his money.”

Hunter has also worked hard to cut costs at his various retail interests by developing centralised warehousing systems which all his diverse portfolio of stores can use. This may be something he sees working in the housebuilding sector too, and his aborted quest for Wilson Bowden could be based on a desire for economies of scale to make it work.

This would be typical Hunter foresight, shrewdly spotting a market and establishing a framework to exploit it. It would also fit in with Hunter’s public desire to improve communities which up to now he has done through his various charitable foundations. But would HBOS be willing to continue to back him as he seeks to revolutionise urban regeneration and housebuilding?

Where HBOS fits in

The precise role of HBOS in these deals is shrouded in as much secrecy as the Da Vinci Code. Along with providing debt finance, HBOS’ integrated finance unit and its joint ventures unit also take equity stakes in deals. Headed by Peter Cummings, who worked with Hunter and retail tycoon Sir Philip Green as far back as the pair’s turnaround of Sports Division and when Green acquired Sears in the late 1990s, HBOS’ corporate division has built up a strong presence in the housebuilding sector acquiring stakes in Cala, Linden, Countryside and Gladedale.

How West Coast and HBOS divide the investment in their deals remains unclear. What is certain is that HBOS has decided to reduce a little of its current exposure to what, despite one of the longest housing booms in memory, remains a highly cyclical market. Against a backdrop of rising interest rates, it is not inconceivable that Cummings’ bosses at HBOS, who, through the Halifax, also supply the cash for most new homebuyers’ mortgages, are mindful of the current sharp downturn in the once booming US housing market, a downturn precipitated in part by higher borrowing costs.

The new Scottish enlightenment

One thing that is certain is that no one will ever be able to accuse Hunter of being one of the idle rich. In between his various philanthropic works, buying housebuilders, and building up shares in a raft of sectors, Hunter also found time last month to organise a summit for Scottish business leaders where he urged them to join him in spearheading a “new Scottish Enlightenment” to rival the 18th-century period that produced great thinkers such as Adam Smith and David Hume.

Tired of waiting for politicians to act, Hunter wants business to lead the way in making Scotland more prosperous by focusing on education, biotechnology, financial services, renewable energy and tourism. A man who has ambitions to turn around the fortunes of an entire nation is unlikely to balk at the prospect of making a success in housebuilding.