With the economic downturn threatening the survival of all homebuilders, two of the nation's largest have decided that joining forces will give them the best chance of weathering the storm.
Pulte Homes, Bloomfield Hills, Mich., announced an agreement to merge with Centex Corp., Dallas, in a stock-for-stock transaction valued at $3.1 billion, comprising $1.3 billion in equity and $1.8 billion in debt. The combined company would become the largest homebuilder in the United States.
Combined, the companies accounted for $11.6 billion in sales and 39,000 home closings in 2008. The merged company will operate under the Pulte name, be based in Pulte's headquarters in Michigan, and be led by Pulte President and Chief Executive Richard Dugas Jr.
In a joint release announcing the deal, Pulte and Centex said the merger would allow the companies to move forward with a cash stockpile of $3.4 billion. The combined company would have an equity market capitalization of $4.1 billion with Pulte shareholders owning approximately 68 percent of the company and Centex shareholders the other 32 percent.
The two companies have been savaged by the housing bubble's collapse. In the fiscal quarter ended Dec. 31, 2008, Centex reported a net loss of $976 million and Pulte a loss of $338 million, which translated to year-over-year earnings declines of 49 percent and 37 percent, respectively, according to Builder magazine.
“Combining these two industry leaders with proud legacies into one company puts us in an excellent position to navigate through the current housing downturn, poised to accelerate our return to profitability,” said Dugas. “Centex's significant presence in the entry level and move-up categories is complemented by Pulte's strength in both the move-up and active adult segments.
“The combination will also allow us to capitalize on the opportunities presented by the addition of Centex's land positions to Pulte's, including Centex's sizable holdings in both Texas and the Carolinas, two areas that continue to exhibit strength in the face of today's difficult housing market.”
The merger is the largest among homebuilders since the downturn began. The impact on the electrical industry's residential-oriented manufacturers and distributors may be substantial, as the companies are looking to purchasing synergies for some of the efficiency gains and cost savings the deal could produce.
Pulte expects that efficiency gains and other savings from this transaction should generate cost reductions of approximately $350 million annually, consisting of approximately $250 million in overhead savings and $100 million in debt expense relief. Pulte also expects to realize additional savings opportunities through production efficiencies and purchasing synergies, the release said.
“By acting decisively now, we're creating unrivaled firepower to capitalize on the opportunities in homebuilding that are now becoming visible on the horizon,” said Centex Chairman and Chief Executive Timothy Eller. We will have a deeper and more expanded presence that we are confident will allow us to begin realizing the benefits of our combined scale immediately.”
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 combination of Pulte and Centex will bring together several prominent brands, including Fox & Jacobs Homes, Centex Homes, Pulte Homes, DiVosta Homes and Del Webb. The combined organization will expand its geographic footprint to cover 59 markets, 29 states and the District of Columbia.
The companies also intend to build on their track records for customer satisfaction — both companies have won the Platinum Award from J.D. Powers & Associates for customer satisfaction.
The transaction is subject to approvals from shareholders, closing conditions and regulatory approvals. Certain Pulte and Centex officers and directors have agreed to vote their shares in favor of the transaction.
The merger would make the new Pulte the market leader, in terms of closings, in Atlanta, Chicago, Dallas, Indianapolis and Raleigh, N.C. According to Builder, the combined entity would be among the top three builders in 25 of the top 50 markets in the U.S., among them several markets — Phoenix, Las Vegas, Cape Coral, Fla., and Riverside-San Bernardino and Sacramento, Calif., — that have been particularly hard hit by the economic and housing downturns.
Most economists maintain that it's too early to declare that the housing market has hit bottom, but there are indications that the rate of decline may be slowing. Recent reports have shown slight increases in sales of existing homes, housing starts and initiation of new mortgages, though home prices continue to fall in most markets.