UPDATE: Pulte, Centex Deal Not Start of Builder M&A Spree
09 April 2009 - 4:37AM
Dow Jones News
Pulte Homes' (PHM) agreement to snap up 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 D.R. Horton Inc.
(DHI) and Lennar Corp. (LEN) off their perch. It also gives Pulte
first pick of ailing competitors.
"A lot of people have believed and have speculated that there
was going to be consolidation in the space," said Richard Dugas,
Michigan-based Pulte's president and chief executive. "It was just
the right time."
Still, some experts say the news, which stunned the industry
before the market opened Wednesday, won't revive mergers and
acquisitions, which have essentially stalled as the worst economic
downturn in decades drags on.
More deals would make sense as the industry struggles to
survive. Builders have watched profits and their market caps
crumble. 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 difficulty competing with
a swelling count of bargain-priced foreclosures.
With lessons learned after gorging on overpriced land during the
boom, builders seem more likely to pick up cheap land from the
burned lenders. Indeed, most 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 all the more
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, this announcement combines two of the industry's
strongest names, putting it among the top three in 25 of the
nation's top 50 markets, including San Antonio, Phoenix and
Sacramento.
The portfolio gives the powerhouse more balance, letting it
better tap buying segments from active adults to first-timers, who
are considered the best source of business right now - thanks, in
part, to tax incentives designed to revive the market. And it will
have plenty of cash to wait out the downturn - approximately $3.4
billion as of March. 31.
Pulte also says joining forces leaves it poised to accelerate
the return to profitability, which could leave other builders
thinking of similar deals.
Indeed, the National Association of Home Builders trade group
said it expects similar activity in the near future. Historically,
mergers and acquisitions have "accelerated coming out of downturns,
as more-liquid builders look to take advantage of strategic
opportunities to build their market share," wrote UBS analyst David
Goldberg. "We expect this trend to hold in this cycle, especially
as smaller private builders look to exit the industry."
But others say this time could be different. 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 Homes USA
(BZH), Hovnanian Enterprises (HOV), M/I Homes (MHO), Meritage Homes
Corp. (MTH) also have change-in-control provisions that would make
a transaction much more difficult."
Bryan said that was a big factor. "Clever Pulte bought 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," he said. Wednesday's announcement includes $1.8 billion
of debt.
That means gobbling up a private player isn't an easy workaround
for publics looking to grow.
Private builders, which lack massive cash stockpiles, have
experienced more turmoil than their public counterparts. The market
has been crushed by tightened liquidity that has curtailed
construction, said Russell Long, director of O'Keefe &
Associates Consulting, a turnaround firm acting as court-appointed
receiver for several failed residential projects in Michigan.
Private builders also typically have smaller footprints.
"They're more localized and there'd be no reason to merge," he
said. "They'd try to survive to see another day, but the private
companies wouldn't have the synergies that made the Pulte and
Centex deal work."
-Dawn Wotapka; Dow Jones Newswires; 201-938-5248;
dawn.wotapka@dowjones.com