Pulte-Centex: Second Day Thread
On May 22, 1963, New York Yankee slugger Mickey Mantle hit The Home Run. The blast came from the left side of the plate against Kansas City [Athletics] pitcher Bill Fischer, and the ball struck Mantle’s bat and soared toward the ornate facing of the uppermost right-field reaches of the now mothballed old Yankee Stadium in New York. Fans and fellow players said the ball was still rising when it smacked the morter facade and caromed back into right field.
Tape measure home runs these days now all come with a cloud of uncertainty, given all the ways players seem to need or want to supplement their own strength.
The House That Ruth built had capacity to seat 57,545 fans, but it was almost like an unwritten law that gave any fellow the right to say that he was there at the stadium in the Bronx the day of The Mick’s legendary dinger. We were eight years old, but have enjoyed the license of any New Yorker and Yankee fan to white lie about being eye witness to our idol’s feat of wonder.
Which brings us to yesterday’s Pulte-Centex mega-deal, which at the very least, has energized a nearly comatose industry with talk of possibilities.
And just like that May evening in 1963 in the Bronx, it seems suddenly to be the case that everybody in the home building industry worked at one time for either one or the other of the companies. A fair number of people have put in time at both.
None of them are surprised that the deal–whether it makes strategic sense or not–ultimately happened; the timing is the only thing that dismays who we’ll call “The Ex-ers” to describe the host of former management and operational folks we’ve canvassed to try to make more sense of the $1.3 billion take-over.
The trouble most Wall Street investors and their representatives have on a fundamental level with the home builder sector is that, even when they’re allowed to put their head under the hood of the company they don’t know what they’re looking at. Home sites, neighborhoods, management talent, manufacturing capacity, distribution skills, sales and marketing … it simply doesn’t all add up.
So it’s when home building veterans themselves look at this deal–beyond the fact that Pulte bought $1.3 billion in cash, some actual number-to-be-named later in cost savings (i.e. nobody we spoke with believes there’s $250 million annually in overhead costs that can come out unless everyone at one of the companies is fired)–there’s some insight into what’s going on and what can be expected.
Here’s some topline notes from the “Ex-ers.” We’ve seeded out malice and speciousness, but left some of the spicier speculation in for audiences to decide on how credible the observation is.
* Centex CEO Tim Eller is said to have talked over the years with Bill Pulte and, more recently, with Richard Dugas about the cultural fit of the two companies on a regular basis. Most recently, in 2004, Mr. Eller was disappointed to learn that his company would never succeed in being the “acquirer” in a deal, and therefore, until now, he’s been unmotivated to pursue it.
* Both Pulte founder Bill Pulte and current CEO Richard Dugas have long coveted greater access to what they call Targeted Consumer Group 2 and 4, which is Pulte’s segmentation designations for entry-level buyers. Pulte himself retained ownership of a brand “American Homes,” which was one of the company’s acquisitions through the years, specifically to aim at entry-level consumers. More recently, Pulte was said to have been very close to doing a deal to acquire C.P. Morgan’s Carolinas operations to give it entree with the entry-level buyer. The Centex play is simply a more grandiose execution of a plan that’s been in place for years.
* The Centex acquisition gives them a possible brand line to make more successful inroads into more affordable single-family product. One issue there is that Pulte’s insistence on higher quality behind the wall could counteract unit profitability on more affordable Centex houses, and Pulte’s purchasing team won’t be able to go toe-to-toe with subs and manufacturers on unit prices and time cost studies, now that the more experienced talent has left the building, so to speak.
* The big question is the savings. The $250 million a year number is hard to fathom, given that you can take out division presidents, payroll, marketing and sales, and a lot of other corporate headquarters people who are redundant in the organizations. But with more than 950 active communities, Pulte will still need supers, sales people, and managers in the field dealing with issues like keeping bonds current, paying the insurance, dealing with special service area zoning and other issues that require constant updated vigilance.
* Pulte has recently restructured costs out of corporate around 200 of its communities in the last year, with some attention to KB Home’s lower cost production and management system. Dugas is said to feel he has an effective corporate-directed neighborhood restructuring model now, and it will probably use this template to go through rationalizing Centex’s 490-some communities.
* Centex–and Pulte too, for that matter–have many many unprofitable markets. In its heyday in 2005, a third of Pulte markets contributed more than 90% of the company’s profitablity. Now, between Pulte and Centex, fewer than double digit markets will be expected to be profitable over the next 12 months. This means the “return to profitability” mantra for Wall Street is sheer spin.
* As for whether this deal will precipitate others, a look at companies balance sheets rules out a number of possiblities–at least as acquirers. “Ex-er” speculation is that Lennar CEO Stuart Miller would probably be the most likely of the bunch to leverage Lennar’s balance sheet strength to do something. Word is Miller came this close to a done deal with Bob Toll in 2005/06, but Mr. Toll woke up the next day and said he’d changed his mind. A Lennar/KB Home combo is also a possiblity in the minds of many.
No doubt, we’ll keep talking to people, and a lot of those people will have been “there,” which is to say Pulte and/or Centex in the the recent past. What would you like to know from them?
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