Struggle for Survival Forces Pulte and Centex Merger

By Don Miller
Associate Editor
Money Morning

Facing the worst housing slump since the Great Depression, Pulte Homes Inc. (PHM), and Centex Corp. (CTX), decided to combine forces in what is widely seen as a bid for survival.

Pulte, the fourth-largest U.S. homebuilder, agreed to purchase Centex, the third-largest, for $1.3 billion in an all-stock deal that creates the largest U.S. homebuilding company by revenue and throws each of them a much-needed safety net.

"It's pretty normal consolidation in a very troubled industry," Gary Shilling, president of investment research firm A. Gary Shilling & Co. told Reuters. "It's exactly what you'd expect. These companies are obviously in big trouble."

Pulte will exchange 0.975 common shares of its stock for each share of Centex, valuing the acquisition at $10.50 per share.  That's a premium of 32.6% over the stock's 20-day average price, or 37.8% above Centex's closing price on Tuesday.

The deal comes after both companies' shares took a beating as new home sales declined more than 75% from their July 2005 peak. During the past year, Centex has lost 70% of its value while Pulte lost 30%, as they reported seven and nine straight losing quarters, respectively.

The combined company will benefit from $350 million in cost savings, including $100 million in debt-expense relief, because of complimentary geographic operations and market segments, Pulte said in a statement. Pulte, which will take on $1.8 billion of Centex debt and own about 68% of the combined company, said it expects to retire more than $1 billion of debt before the end of this year.

Pulte and Centex held more than 39,000 closings in 2008 with total revenue of $11.6 billion. The combined company would have a market capitalization of $4.1 billion, Pulte said.  The new company will have more than $3.4 billion in cash as of March 31, 2009.

"This is really good because not only are there too many homes, there are too many homebuilders," Vicki Bryan, a senior high-yield bond analyst for New York-based Gimme Credit LLC told Bloomberg News. "Cash is king and this gives them $3.4 billion, the most in the industry, which means they don't need the banks."

Stock-only purchase deals may multiply this year, experts say, because they reduce costs and benefit shareholders when conditions improve. They allow companies in struggling industries to increase their heft without depleting cash or forcing them to raise costly financing.  In the current environment, homebuilders are especially ripe for such deals.

"You have both weakness in sales and write-downs on land and existing inventory of houses," Shilling said. "All these things are putting pressure for consolidation in the industry."

An unexpected sales jump in February may be a sign the housing market finally is stabilizing, Pulte Chief Executive Officer Richard Dugas said in an interview with Bloomberg.

"We're not suggesting we have a perfect crystal ball but we're cautiously optimistic about what we're seeing now," Dugas said. "The combination means we will return to profitability sooner than we would."

New home purchases in the U.S surprised analysts by rising 4.7% in February from record lows, jumping to an annual rate of 337,000, versus a pace of 322,000 in January, according to the U.S. Commerce Department. The median sales price was down 18% from February 2008, the biggest year-over-year drop on records that date back to 1964.

The combined company will have a presence in 59 U.S. markets, will retain the Pulte Homes name and be headquartered in Bloomfield Hills, Mich., Dugas said. The deal gives Pulte access to states like Texas and the Carolinas, which have shown comparatively strong new home sales during the housing slump.
Although Dugas and Centex CEO Timothy Eller stopped short of saying the latest reports signal a bottom for the industry, homebuilders' shares have rallied in the past month as lower mortgage rates are expected to help the industry recover.

The Pulte and Centex brands will both continue. Pulte's Del Webb brand caters to buyers over 55 and accounts for roughly 50% of sales.
"We expect opportunities for synergy to be immediate," Eller said.

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