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Two home builders to merge into an industry giant

Pulte Homes is buying Centex for $1.3 billion to create the nation's largest builder. It could spur other deals.

April 09, 2009|Roger Vincent

Giant home builder Pulte Homes Inc. agreed Wednesday to buy rival Centex Corp. for $1.3 billion in a move that could spur more mergers in an industry decimated by the housing slump and the reeling overall economy.

The stock transaction would make Pulte the biggest home builder in the country with a presence in more than half the states, including Dallas-based Centex's sizable land holdings in Texas and the Carolinas.

The combination would pair Pulte's strength in creating housing for affluent retirees with Centex's niche serving young first-time buyers.

Pulte, which is headquartered in Bloomfield Hills, Mich., and Centex both have a substantial presence in California. Current Pulte developments include Sonoma Ranch in Palmdale and Sabella at Talega in San Clemente. Among Centex's California home projects are Milestone in Santa Clarita and RiverPark in Oxnard.

The deal makes sense in these tough times for home builders, said Richard Green, director of the USC Lusk Center for Real Estate.

"What this says is that companies are desperate to cut overhead right now," Green said. "I see this as a good, cost-saving move for both companies."

Gains in efficiency should generate annual savings of about $350 million, Pulte officials said. Those gains would come mainly from cuts in overhead and debt. The larger company would also be able to command better prices for materials, labor and other development costs.

Other home builders may also consolidate, said economist Peter Morici, a professor at the University of Maryland.

"There could be more of these," Morici said. "Home builders come in all sizes. There are too many of them with too much capacity and too much overhead. Plus, they're used to paying themselves really well."

The long housing boom of the 2000s that saw home builders profit handsomely from home sales as well as the escalating value of land they owned has left a glut of homes behind, Morici said.

"The country is over-housed. We have a couple years to work this out," he said. "It's all part of the economy shifting down for a while."

A Pulte-Centex deal makes particular sense because the company can appeal to two strong but very different markets, said Stuart Gabriel, director of the UCLA Ziman Center for Real Estate. Aging baby boomers heading into retirement may move into an amenity-rich Del Webb community developed by Pulte, whereas young first-time buyers on a tight budget might spring for the kind of bargain-priced home Centex specialized in building.

Other home builders who can find similar strategic benefits to joining forces might do so, Gabriel said.

"More mergers may be on the way because the survival of many other players is really at stake," he said.

Analyst Ivy Zelman said not to expect a rush of consolidations, however.

"We don't think it's likely there will be further mergers," Zelman, chief executive of New York-based Zelman & Associates, said in a conference call Wednesday. "We think buying assets today with stock is not a good idea. Why not just buy land instead?"

Zelman did, however, speculate on which home builders might be in position to buy other companies or be sold. Fort Worth-based D.R. Horton Inc., Lennar Corp. of Miami and Reston, Va.-based NVR Inc. are potential buyers, she said. Sellers might include Denver-based MDC Holdings Inc. and Ryland Group Inc. of Calabasas.

"In between" as potential buyers or sellers are Los Angeles-based KB Home and Horsham, Pa.-based Toll Bros. Inc., Zelman said.

Pulte's acquisition of Centex is expected to be completed in the third quarter. The combined company would keep the Pulte name and Michigan headquarters. It would have cash reserves totaling $3.4 billion and pay off $1 billion in debt by the end of the year.

Shareholders would receive 0.975 of a share of Pulte common stock for each share of Centex that they own. The transaction is valued at $10.50 per Centex share based on Pulte's Tuesday closing stock price of $10.77. That amounts to a 38% premium over Centex's closing price of $7.62 on Tuesday.

Executives at both Pulte and Centex said the deal would position them for what they say is the beginning of a recovery in the housing market.

"We are seeing some kinds of improvement in the marketplace," UCLA's Gabriel said. They include declining prices and rising sales in the Inland Empire, one of the areas hit hardest by the housing crash.

"There are segments of the market where we see significant signs of life and feel we are reaching a floor in pricing," he said.

Shares of Pulte closed down $1.13 on Wednesday at $9.64 but rose in after-hours trading. Centex shares rose $1.44 to $9.06


Bloomberg News was used in compiling this report.



At a glance


Headquarters: Bloomfield Hills, Mich.

Founded: 1950

Chief executive: Richard J. Dugas Jr.

Employees: 4,700

Revenue (last 12 months): $6.3 billion

Selected California projects: Madeleine Court (Palmdale), Stellan Ridge (Riverside), Sabella at Talega (San Clemente)


Headquarters: Dallas

Founded: 1950

Chief executive: Timothy R. Eller

Employees: 2,600

Revenue (last 12 months): $5.3 billion

Selected California projects: Luminaria at RiverPark (Oxnard), Citrus Commons at the Preserve (Chino), SageCrest at RiverBend (Orange)

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