Few financial executives are able to say they’re in the prime position of
doing business in a sector where demand outstrips supply. But with a demand for
240,000 new housing units a year and a supply of only 170,000,
Barratt‘s FD Mark
Pain is sitting pretty.
Barratt moved into the blue chip index in June last year – it had previously
ranked 109th in the FTSE – just four months after Pain, formerly FD of Abbey
National, joined the housebuilder.
Almost as soon as he was appointed, Pain signalled his intention to lead his
new company into the FTSE 100 through an aggressive plan focused on greater
leverage of the company’s balance sheet.
‘We were FTSE 109 and my view was the ambition that had been placed on the
company by its board. I believed in the capability of the people in the company
to deliver that ambition, and the opportunity within a consolidating market to
either grow organically or inorganically would enable us to do that,’ says Pain.
He admits he reviewed the company before taking up the offer from headhunters
last year following a gap year after his departure from Abbey.’I do think you
need to go into organisations having done the analysis. You need to think hard
about what it is you’re going to be able to do with it and what you want to do,’
From the outside looking in at Barratt, Pain saw a supply-demand imbalance,
noted the fragmentation of the players in the industry and realised the
potential for consolidation activity. The right kind would surely move Barratt
into the next index.
‘It was clear there were huge opportunities from an organisational point of
view to grow the business. Yet looking in from the outside, I couldn’t
understand why the sector was trading on very low multiples in a very highly
cyclical sector. I could see real operational capability, translating that into
growing a strategic position and really driving home that operational capability
and building a business.
‘And I felt it was an industry that would go through a lot of fundamental
change, and we were starting to see some consolidation, but it is still very
His keen study of the sector and ideas of further leveraging the balance
sheet convinced the board. Within a month of his appointment, rival housebuilder
Wilson Bowden announced it was going to go through an auction process and Pain
and his team entered into intensive negotiation that finally culminated in an
agreement in February to purchase the company for £2.2bn.
There were a number of firsts noted in the sector as Barratt took over Wilson
Bowden. It was the first major acquisition by Barratt, the largest acquisition
in the sector, and the largest ever purchase of a UK housebuilder.
The biggest acquisition before that was the £1.1bn buyout in 2006 of
retirement homes builder McCarthy & Stone by a consortium led by HBOS, Bank
of Scotland and West Coast Capital. Barratt’s raising of £2.1bn in acquisition
financing was also the largest ever sum borrowed in the sector.
At the time, analysts noted that the price valued Wilson Bowden at 1.7 times
its book value, while highlighting the fact that Pain, as a ‘newcomer’ to the
sector along with Barratt’s newly appointed CEO Mark Clare, formerly of
Centrica, were ‘key risks’.
It didn’t deter Pain. In fact, it spurred him on to ensure that Barratt would
‘extract the value’ – a favourite turn of phrase – from its acquisition.
‘Obviously, as you go in, you learn more, you understand more, you understand
the constraints and the additional areas of value, and you work with a team that
is very driven and very capable. Now we’ve acquired the company, we’re going
through the integration process, and making sure we’re integrated successfully,
extracting the values we expect from the acquisition,’ he says.
Pain says getting into the FTSE 100 isn’t a goal in itself. ‘It was a logical
move through from the strategic position of the company, and that was the market
that was emerging. It’s now getting more complex out there,’ he says.
The much talked of ‘cooling’ of the market is just one complexity the FD must
deal with. But he still expects Barratt to report a strong performance to the
June 2007 year-end due to strong growth and increased sales.
‘We’ve not yet felt the impact of the market slowing. Yet we’ve got to be
prudent. After five rate increases, the market will slow. We are doing
everything to ensure our performance is as good as we can make it,’ he says.
At least this time round, the signs of a shaky market are quite clear, which
means Pain and his team have ample time to take strategic decisions. Back at
Abbey National in 2002, things didn’t look so comfortable.
During the latter part of his 15-year stint at the bank, during which he held
positions ranging from regional sales director and financial controller through
to FD, Abbey experienced grave problems. It ended up writing off £256m in its
business banking unit.
Pain admitted at the time that ‘strategic errors’ had been made. Those errors
related to the bank extending borrowers’ mortgages by up to 15 years. During
this period, which saw considerable turbulence in interest rates, Abbey extended
the terms on customers’ repayment-style mortgages without their knowledge.
But Abbey was not alone when it was hit, as the FTSE fell during the year
from 6,000 tounder 4,000, and the US experienced a credit crunch that also saw
the downfall of Tyco and Worldcom.
Pain describes the events as ‘a kind of perfect storm’. ‘You had US corporate
credits deteriorating significantly, and you also had a significant bore in the
UK equity market. The FTSE fell and that impacted on the life assurance
business. So two things came together at the same time, which placed
considerable stress on the capital within Abbey National,’ he says.
Changes were made to management, with calls for the CEO Ian Harley to leave.
Despite the public humiliation, Pain, as FD, never wavered in his support of the
Pain and a new team went through a successful period rebuilding the bank,
narrowing down the wholesale activities, tightening life assurance and pushing
to grow the retail bank. And just when the bank turned the corner, Banco
Santander Central Hispano, Spain’s largest bank, came in with an offer to
purchase the franchise. Santander acquired Abbey for £9.5bn after shareholders
approved the takeover.
Pain didn’t want to go back to financial services and was reluctant to join
another big corporate after Abbey, which at its peak employed 21,000 people and
had a higher market capitalisation than Barclays. In his year out, he decided he
wanted to get involved in something more visible, ‘something’, he says, ‘which
everyone would have a view on’.
‘And everyone has a view on building and houses. It is something that relies
more on the creativity and experience of people rather than big robust systems,
which often remove people from the systems,’ Pain says. In his view, that is
what housebuilding is really about.
Pain is all too aware of the challenges of affordability and the government’s
social agenda. Once again, he is spurred on: ‘I saw those issues before… and see
them still now as quite an exciting opportunity to drive the company to be the
leader in the industry.’
Challenges on the home front
Several allegations have recently emerged that accuse housebuilders like
Barratt of ‘land banking’. Yet the reality is that 97% of developments start
within three months of obtaining detailed planning permission. Mark Pain is at
pains to stress that 85% of the land Barratt builds on is in fact ‘brownfield’ –
the term given to old industrial sites.
The housing market together with more eco-friendly constructions have become
a high priority for Gordon Brown’s government, which means the sector has to
step up on the delivery end.
Pain believes the manner in which the home builder interplays with
government’s agenda is ‘absolutely critical’. He says: ‘We have a number of
people who specialise in dealing with policies and issues relating to the carbon
agenda, and we’re increasingly trying to build up an effective, joined-up
dialogue on these issues with government.’
The first and most fundamental challenge, he explains, is affordability.
‘People are taking on huge amounts of debt in order to be able to buy houses.
Key workers are finding it very difficult to get on the property ladder.’
Second on his list is the carbon agenda. ‘We are talking about carbon-neutral
homes in a period of about five to eight years, depending on which part of the
country you’re building in. So there is an increased agenda around carbon and
Third is social housing. ‘We’ve got to figure out what mix of social housing
we need to put forward in the UK in terms of what combinations will fit the
changing social fabric of the UK.’
The land that is becoming available for development is also infinitely larger
and more complex than ever. ‘We’re now required to build private homes, and with
it, social units, with commercial and retail property, and these are big chunks
of land with large amounts of money at risk. The complexity of handling that
requires bigger companies with more capability.’
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