Merger Rock & Roll Begins: Pulte Gets Centex
Pulte Homes and Centex Corp. agreed to a stock-for-stock merger transaction that makes Pulte the planet’s largest home building company. Remember home building?
The Wall Street Journal reports this a.m.
Pulte Chief Executive Richard Dugas Jr. said the deal would combine Centex’s strength in the entry-level and move-up categories and Pulte’s strength in the move-up and active adult community segments, forming the largest U.S. home builder.
Pulte last month adopted a shareholder rights plan with a 5% trigger to help preserve tax assets that would be lost with an ownership change.
Under the deal, which also includes $1.8 billion of debt, Centex shareholders will receive 0.975 Pulte common shares for each share of Centex they own. Based on Pulte’s Tuesday closing price of $10.77, the deal is valued at $10.50 per Centex share, a 38% premium over Centex’s Tuesday close of $7.62. Pulte shareholders will own about 68% of the combined company, while Centex’s will own about 32%.
More on this later. What do you think? Who’ll D.R. Horton–which has stocked up $1.8 billion in cash “dry powder” pick as its dance partner? Will Lennar sit back and become a large-cap also-ran? Unlikely.
Here’s a perspective from Reuters, which notes that Pulte CEO Richard Dugas will take over as chairman and CEO of the combined company:
Experts predict more strategic stock-for-stock deals this year in distressed sectors, as they help companies reduce costs while allowing shareholders to benefit when conditions improve. With such transactions, companies in struggling industries can bulk up without having to deplete much-needed cash or trying to raise scarce and costly debt financing.
Here’s CNBC’s report and quick analysis on the merger from this morning.
David Goldberg, UBS’s Home Building & Building Products analyst, has this first-blush observation:
Although at first glance we believe the deal represents strategic advantages for both companies, we await further details on the exact benefits. That said, this deal will provide greater operating leverage as Pulte expects to realize ~$250mn in cost savings annually through reduced overhead. Further, it gives them access to high quality lots, well positioned geographically and across price points, while preserving cash.
Here’s how the companies’ press release addresses what will happen to Centex CEO Tim Eller:
Mr. Eller will join the board of directors of Pulte as vice chairman and will serve as a consultant to the company for two years following the close of the transaction. The board of directors of Pulte will be expanded and will include four current members from the Centex board, including Mr. Eller, and eight members of the current Pulte board, including company founder and current Pulte Chairman William J. Pulte.
Make Over Mondays
Know the feeling? A month ends, and you check it off. It’s another month you don’t have to stare down from the front end. We don’t imagine there’s a home builder out there who doesn’t relish the thought of seeing the tail lights of 2009.
So, what happens these Mondays, the day that not so long ago in people’s memory was the day you practically needed an armored car to pull up and take all the deposit money from the weekend past to the bank?
These months, Mondays should be about all the little things because the big things are beyond our control. This limbo we’ve all gotten to know so well, like a form of progressing malnutrition, is about the stubborn distance that lies between a bid and an “ask.” There are four money buckets: The money you’ve got; the money you’ve got coming in; the money you owe; and the money you need. The amount that one or more of those is out of balance is probably the extent to which you’re watching Bloomberg news in the mornings, as opposed to ESPN.
You can control the weeds in the flower beds of the sales models. You can control the number and the quality of the smile-and-dial phone calls you and your sales associates make to make your quotas. You can control the energy-level of affirmation for every sales success one of your team nets. You can control the follow through and care every one of your customers gets so that they’re your No. 1 branding strategy. You can keep dialing your bank or bankers, and let them know where you are with your business. You can keep showing up at the country club, because those local club deals are still one of the No. 1 ways capital will find its way back into real estate. You can go out into your market and find a land seller or developer who just might be willing to make you an offer you can’t refuse on a piece of dirt that would move even in today’s horrid environment.
You can buy up some REOs, taking them off the market, and using your subs and your staff, you can make them available for rent or rent-to-own. You can dial back your costs far enough to zero out all but the essentials and offer your services as fee builders.
These are some of what people mean when they talk about “all the tricks” in the book. It’s the book for down cycles. One of its rules is you mark off weeks and months as you survive them, and put those days behind you. You then start a new week or a new month like a baseball player who starts each game “0-for-the-game.”
Everyone’s at that same starting point, and while an 80-year stalemate between big and ask has got things gummed up from a macroeconomic standpoint, this is the first April of the rest of your life, and it’s time to get things rolling.
After all the trillions and all the programs and all the efforts to lure in the private sector, the only sure way to counter toxic assets is with assets that aren’t toxic. And one of the only ways to get to assets that aren’t toxic is to help house buyers get past their fear of risk. They need assurance that what they’re puchasing will be the property they’re committed to making their home.
Home Building’s Plot Thickens
Theory, circa 2006: Efficiently scaled home builders had enough elasticity in their systems to push their home prices down — and out ahead of — below the competing market. That would keep them in the business of sustainingtheir management, marketing, and home building infrastructures in well-oiled condition, turning inventory in a methodical manner, and generating cashflow on a virtuous time-released schedule.
Nice theory.
Circa Spring 2009, a third successive “Spring Selling Season” has turned into a third successive Hand Wringing Season. Even the best-scaled, balance sheet scrubbed public home builders are looking at every dollar in their cash till and gut-checking themselves as to whether that dollar has 2009′s name on it, or maybe 2010′s. Is that dollar “dry powder,” for opportunistic muscling for market dominance once the constipated land-transaction market finally gets moving again?
Or, just as likely, will that dollar need to try to attract other capital, get in the lengthening line of debt term renegotiation with nameless, faceless, and sometimes clueless lenders and bondholders who are beyond sweating over whether their risks have come to roost.
With KB Home’s bellwether earnings call a couple of weeks ago, the Los Angeles-based home builder’s CEO Jeff Mezger offered a ray of hope amid the brutal realism that prevails as to the difficult leg ahead. Eventually, one will finally stop saying, “It’s going to get worse before it gets better,” because despite the complex of negative feedback loops whirring us into more pain, it will finally be the worst it can get.
Second up in the bellwether home builder earnings call parade was Lennar CEO Stuart Miller. Recalling Stuart’s prognosis at this time of year since 2006, each time it was for continued deterioration in the market, with no signs of an end to the worsening. Now, at least, Mr. Miller, while not sanguine, is indicating that the bump-along-the-bottom period may be approaching.
The twist to the Circa 2006 theory above is that while the big home building companies are secularly a shadow of their former selves, they’re practically the only engine left in the barely pulsing new-home economy. They’ve morphed into quarter-sized versions of their 2006 heft, they’ve said to hell with methodical liquidation of inventory, and chewed off connections to immense land holdings like they’re coyote ugly one-night stands; they’ve scrapped and scrambled for sales; they’ve stormed Capitol Hill with bids to knock reason into the unreasoning, irrational political complex; they’ve excavated their balance sheets of huge wells of expense; and they’ve piled up cash reserves in hopes of being around for an Resolution Trust-like land reset goldrush.
Still, each percentage point of unemployment–coming as they do torturously on ladder-steps of months and quarters, and half-years–represents a new spread of distance between now and a recovery horizon.
We’re out on a limb, of course, but we believe we’re in the middle of the last non-starter spring selling season of the current cycle. Another tough eight month stretch and the rare rays of light that have sparked up the gloom will start adding up.
Meanwhile, we continue to be amazed at the fortitude, or maybe its just stubborn resolve of those who’ve stayed in the game with every trick in the Book of Housing Cycles. You must be in it more than for the money; it must be part of the DNA. Former U.S. Secretary of Housing and Urban Development Henry Cisneros, calls you “housers,” which is not a pretty word.
But what it means–he describes a young mother coming home to one of your homes with a newborn who’ll one day be going off to college–is why you continue to fight to be here.
That’s Fact, Circa 2009.
Notes from the Eight-is-Not-Enough File
The vicious circle of declining home prices, rising foreclosures, and further depressed home prices has created a parallel vicious circle of economic policy getting ripped apart by political self-interests, requiring an even heavier hand of economic policy.
By looking at where new-home sales have perked up, one can guess that California, which has added its state income tax credit of up to $10,000 to the first-time home buyer tax credit ante rolling out from the United States government, can serve as a poster child for more stimulus to jolt some virtue into those vicious cycles.
Movements in support of higher home buyer tax incentives are still operating at a state and national level.
Here’s an argument from yet another Ivy school economist about the shortcomings of the Obama plan to stabilize housing by stopping a slew of foreclosures from occurring. Yale economics professor John Geanakoplos stopped by Squawk Box to talk about foreclosures with Huffington Post diva Arianna Huffington, Becky Quick, Carl Quintanilla and Joe Kernen. Watch below to see why Geanakoplos thinks the Obama administration’s plan to prevent foreclosures will be ineffective.