Home Building M&A in 2010? Don’t Count it Out
Just a little visibility for home builders would be so welcome right now. However, it looks as if clarity about what exactly to anticipate next among home buyers and sellers is on hold.
So, we’re looking at 2010 as another pre-visibility year. It’s another year where we see cash and balance sheet management action plans (a.k.a. savings wherever possible and sales at almost any cost) playing to greater emphasis than revenue generation. It’s not the inflection-point year we might have hoped for, but that doesn’t mean operators get more time just to practice their putting or sand saves.
That pre-visibility period, which essentially got set in motion with the collapse of the credit markets in the Fall of 2008, is not without news, drama, and the need for a plan.
High-probability and low-probability/high-impact events–ranging from China’s tapping the breaks on its economy to the dollar index rising, to domestic GDP growth losing steam, to continued question marks around a real economy that can start putting people back to work–each figure into housing economy scenarios for the next few months. It’s tough to tell them apart, let alone which ones cancel out the others.
New-home building’s economic outlook has in it what we believe to be two opposing forces at work that can make or break survival strategies for 2010. One is job and income trends tied to real economy earnings–and this is an imponderable. We may get another $100 billion stimulus package aimed at jumpstarting a tide-turn from negative to positive job formation.
What home builders place great stock in–perhaps even more than in any headwind they face right now–is scarcity. In many markets, the new-home supply has shrunk to a level where many feel that they’re one good gust away from a “shortage” of homes. Is that gust likely in 2010?
Well, if the burst of home buying activity expected this month and in March and April leading up to the end of the latest tax credit for home buyers runs seasonally true to form on a historical basis, the months’ supply of new homes should close to within a whisper of five to six months’ supply on a run-rate basis. This could be an X factor, and it’s one that many private home building company executives are counting on as a market tipping point.
Meanwhile, it looks as if one drama for the year will be the question of whether we’ll hit that point of a shortage in new-home supply or a shortage of new home builders first. Unquestionably, given the credit and savings environment for both consumers and businesses, the pre-visibility year will be a year of consolidation of greater home building resources among fewer players.
Will we see mergers along the lines of last year’s Pulte-Centex combination? Some say yes, sooner than later.
Although high finance powers that be tell us that 2010 offers little if any greater likelihood of mergers and acquisitions than any other year, it’s not unreasonable to speculate on deals that may get done. Word is that Taylor Wimpey, the United Kingdom-based parent of Taylor Morrison, is exploring either a sale or an IPO for the North American home building operations.
A number of other entities have been the subject of acquisition talk among public companies replete with cash. Woodside Homes, which just emerged from bankruptcy, has a national footprint that matches many of the publics and could represent a valuable land-asset pipeline with operational capacity where needed and efficiencies to capture.
Some mention Standard Pacific as a platform for a company to jumpstart solid volume activity primarily in California, and the just-purchased Florida land assets of TOUSA as a similar opportunity to catalyze cash generation opportunity in the Sunshine State.
Public builders, save Orleans Homebuilders, have all mostly been able to kick their debt-burden can down the road. So the question of distress as a motivator for M&A looms large.
One-off motivators, such as the age and financial disposition of current chief executivies, are also hard to predict. But in an environment where taxation–particularly tax rates on the wealthy and capital gains taxes–will be a force to contend with, don’t count out conversations on succession plans and even mergers that have tax implications as a role player.