When the news of the Pulte-Centex merger broke recently, it was a surprise for most of us (still) eeking out a living in the building industry mostly because it occurred so early in this part of the cycle, but for me it also brought up two big questions: (a) would this put more pressure on other public builders to merge; and (b) what, exactly, was Pulte getting for its investment? Will this simply mean even more lookalike homes in major markets? A story in Fortune magazine ponders these same questions:
Large, well-capitalized homebuilders with low debt, such as D.R. Horton Inc., (DHI, Fortune 500) KB Home (KBH), and Pulte (PHM, Fortune 500) - as well as cash-flush private equity firms - will likely be shopping around, while highly leveraged builders with significant chunks of debt coming due in the next three years are likely targets, industry experts say.
Like companies in just about every other industry, homebuilders are having a tough time refinancing in the frozen credit markets. As a result, distressed builders, unable to meet debt calls, could be forced to sell assets or the entire company at bargain-basement prices.
Builders with debt-to-market cap ratios above 75% include Beazer Homes USA Inc. (BZH), Hovnanian Enterprises Inc. (HOV), and Standard Pacific Corp. (SPF), according to Bob Curran, managing director at Fitch Ratings. Their high debt makes them vulnerable to takeouts if the credit markets don't improve in the next two years, experts say...
KB Home could fit well with Ryland Group Inc. (RYL) which shares a similar market cap and business strategy, says UBS analyst David Goldberg. But, he notes, "Who knows if KB wants to be acquisitive?"...
Most industry experts believe consolidation will accelerate, but many wonder if Pulte might have jumped in prematurely and overpaid for Centex (CTX, Fortune 500).
"We have always felt that there would be additional consolidation in the industry - just not right yet," said Joe Snider, vice president and senior credit officer at Moody's Investors Service in New York. "We're in the middle - we're not at the end yet - of a very deep and long-lasting downturn."
Based on Pulte's closing price on April 7 just before the deal was unveiled, the transaction valued Centex at $10.50 a share, which represented a 38% premium to its closing price of $7.62.
"My gut would tell me that what Pulte paid was a little bit high," says Goldberg. If the market rebounds and prices go up, "Pulte will look like geniuses for buying a big land position at the bottom of the market," he says. But if the market tanks for two or three more years, he believes the merger will be viewed as ill-timed...
Analysts expect a number of distressed builders to exit the market through bankruptcy filings, mergers or fire-sales in the next year or two.
So far, about 17 of the country's top 100 homebuilders - including three publicly-traded builders - Levitt & Sons LLC, WCI Communities Inc., and Tousa Inc. - have filed for Chapter 11 bankruptcy protection over the past two years, says Reichardt. More recently, Comstock Homebuilding Cos. Inc. indicated it may seek bankruptcy protection
Publicly-traded builders, in general, are better capitalized than their rivals in the private sector. Many learned tough lessons from the crippling downturn almost 20 years ago where high debt and inventory levels pushed a flurry of builders into bankruptcy...
Still, many companies are at risk. "Some of the weaker public builders have already gone, and there may be more to go," says Kim. And that's where the well-capitalized players can step in, but they may be best suited to hold off a while longer...
1 comment:
IMO, as soon as we see the bottom in housing starts, we will see a wave of consolidation in the industry. Right now, there is no need for any homebuilder to expand operations, but once there is, it will be much easier and less expensive to buy out a competitor than expand by other methods. Look for those with the most cash to start buying those with the greatest distress, particularly if there is a minimum of geographic overlap in their operations.
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