Pulte, Centex Deal Not Seen Sparking Home Builder M&A Spree
09 April 2009 - 2:03AM
Dow Jones News
Pulte Homes (PHM) agreement to buy rival Centex Corp. (CTX) for
about $1.3 billion in stock seems more like a one-off than a sign
of things to come.
The bold move creates an industry titan with a market
capitalization of $4.1 billion, knocking rivals DR Horton (DHI) and
Lennar Corp. (LEN) off their perch. Analysts say the deal, which
stunned the battered industry before the market opened Wednesday,
won't jumpstart mergers and acquisitions, which have essentially
stalled as the worst downturn in decades drags on.
More deals would make sense. Builders have watched profits and
their market caps crumble along with the market. The sector has
slashed prices, offered more incentives and walked away from land,
forcing charges of nearly $30 billion since early 2006, according
to Moody's Investors Service. And, while there have been glimmers
of hope that the nation's housing market is nearing bottom,
builders face intense difficult competing with a swelling count of
bargain-priced foreclosures.
With the lessons of gorging of overpriced land during the boom
learned, builders seemed more likely to pick up cheap land from the
burned lenders. Indeed, most builders are hoarding cash, waiting to
pounce as distressed lots hit the market.
"All of the builders are licking their chops, waiting for the
opportunity to buy land for pennies on the dollar that will fuel
their growth for the next cycle," said Rob Stevenson, an analyst
with Fox-Pitt Kelton.
That's what made Wednesday's announcement so stunning.
"How aggressive are they going to be with buying land?"
Stevenson asked, adding they're currently sitting on roughly
190,000 controlled lots, a steep supply given current
conditions.
Still, the deal combines two of the industry's strongest names,
giving the combined company top-three positions in 25 of the
nation's top 50 markets. The combined powerhouse will better tap
home buying segments from first-timers, considered the best source
of business right now, to active adult. And it will have plenty of
cash to wait out the downturn - approximately $3.4 billion as of
March. 31.
Competitors might be thinking of joining forces to remain
competitive.
But this transaction is "the easiest deal that could happen,"
said Vicki Bryan, an analyst with Gimme Credit. "The other guys
will have a lot more hair on their deal. They have serious issues
with meeting covenants and they will have even more trouble as the
market deteriorates over this year, and they all have to last
another year."
Credit Suisse analyst Dan Oppenheim agreed, writing in an
analyst note that similar transactions are less likely. "We see few
other companies trading at a discount and being a willing seller at
this time. Lower quality balance sheet companies [Beazer (BZH),
Hovnanian (HOV), M/I Homes (MHO), Meritage (MTH)] also have change
in control provisions that would make a transaction much more
difficult."
Bryan said that was a big factor: "Clever Pulte brought one of
the few builders with no change of control provisions in its bonds,
so it doesn't have to take out Centex's debt, which made this
possible."
-By Dawn Wotapka, Dow Jones Newswires; 201-938-5248;
dawn.wotapka@dowjones.com