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Kaufman to Merge With Lewis Homes

Real estate: The $409-million deal with the family-owned firm would create the biggest home builder in the U.S.


In a deal that would create the nation's largest home builder, Los Angeles-based Kaufman & Broad Home Corp. said Tuesday that it has agreed to buy family-owned Lewis Homes of Upland for $409 million in cash and stock.

The combination of two of the region's best-known builders would expand Kaufman's presence in Southern California and Las Vegas and dramatically increase its land portfolio. The Lewis family--which founded and has operated the Inland Empire firm for more than 40 years--would end up as the largest Kaufman shareholder, with about a 15% stake.

The firms estimate that together they would build about 22,000 homes next year, catapulting them ahead of current industry leader Pulte Corp., a Michigan-based builder.

"The Lewis company is a plum in our industry, and we were secret admirers for a long, long time," said Bruce Karatz, chairman and chief executive of Kaufman & Broad. "This allows us to continue our growth."

The Lewis deal would cap a string of acquisitions Kaufman & Broad has made in recent years in Arizona, Texas and Colorado as it tries to stay on top of an industrywide shakeout.

In the face of such consolidation, the Lewis family hired an investment banking firm earlier this year to study its options, which included selling stock to the public or seeking a merger partner. Despite building more than 3,500 homes a year, Lewis Homes--the third-largest home builder in Southern California--decided it was better to sell than to stand alone.

"It was clear that consolidation was picking up steam in our industry," said Randall Lewis, head of marketing and one of four Lewis brothers involved in company operations. "We could be the victims. We could be the beneficiaries. We thought this could make our company stronger and more competitive in the years ahead."

Co-founder Ralph Lewis, 79, is in poor health, but that was not a factor in the sale of the company, Randall Lewis said.

Under the terms of the agreement, the owners of Lewis Homes would receive 7.9 million Kaufman shares and cash totaling $409 million. Kaufman would also assume $135 million in Lewis Homes debt.

The Lewis family would also receive a seat on the company's board. The transaction--which must still be approved by shareholders--is expected to be completed early next year.

On Tuesday, Kaufman & Broad shares rose $1.06 to close at $23.63 on the New York Stock Exchange. Shares of many home builders rose on the NYSE as investors grew more optimistic about the industry's outlook. The Kaufman-Lewis deal was announced after the market's close.

Lewis Homes was created in the mid-1950s when Ralph and Goldy Lewis started building homes in Pomona and Claremont. Since then, the company has grown steadily and now ranks as the largest privately owned home builder in the country, with about $685 million in annual revenue. Sons Randall, Richard, Robert and Roger plan to stay with the merged company.

"Right now, we are pretty excited and want to see what we can do," said Randall Lewis.

The Lewis family's apartment and property management operations are not included in the sale and would remain under family ownership.

The Lewis Homes brand name would continue to be used on the company's existing developments. The two firms sell homes in many of the same communities, including Fontana, Rancho Cucamonga and Irvine Ranch. However, Lewis Homes usually sells more expensive houses than Kaufman & Broad, which targets first-time buyers.

Along with a valuable brand name, Kaufman & Broad would gain access to the more than 23,000 building lots Lewis Homes controls in Orange County, the Inland Empire, Sacramento, Las Vegas, Reno and other communities.

The additional building lots and home-building operations would help Kaufman remain the largest home builder in California, where its No. 1 ranking has been threatened by Lennar Homes Corp., an aggressive Miami-based builder that has expanded quickly through acquisitions. Kaufman said it expects to build about 15,000 homes nationwide this year.

The merger would bolster the combined company's position in many key markets. In San Bernardino County, where Lewis Homes and Kaufman are the largest and second-largest builders, respectively, the company would end up with 14% of the new-home market--a huge share by home building standards.

"By merging the two companies, there will be a lot more strength," said Steve Johnson, a partner in Meyers Group, a new-home research and consulting firm.

The Lewis Homes acquisition would be the largest ever by Kaufman & Broad. Larger, diversified builders such as Kaufman & Broad have more clout to win lower prices from suppliers and contractors and are able to obtain financing at lower rates and on better terms than smaller competitors.

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