As the cooling-off period in the housing market continues through 2007, conditions may improve for mergers and acquisitions among the nation's leading home builders, say industry experts.
The red-hot housing market of the last decade sent prices for all things home building–related through the roof. The median sale price of new homes rose from $152,500 in 1998 to $245,500 in 2006. The price of land also shot up, as did the asking price of home building companies, scaring off would-be acquirers.
But the market proved unsustainable, and as home buyer demand waned, home prices fell, leading to sliding land values, sticking builders with excess land bought at peak prices during boom times. Because builders had so much land, there was no reason to think about acquisitions, says Margaret Whelan, managing director for home building and building products at UBS.
COMING BACK: Since June 2006, when Dubai-based Emaar properties paid $1.05 billion for Newport Beach, Calif., builder John Laing Homes, acquisition activity in the home building industry has been quiet, a slowdown from the pace of consolidation in previous years. But builders and industry analysts expect that to change in 2007, and already several deals are in the works, with more rumored to follow. - SOURCE: JMP SECURITIES
“Builders discovered that the market was slowing, and we had an unprecedented correction in demand, the magnitude and violence of [which] we've never seen before,” Whelan says. “So there wasn't any reason for deals. Why would you buy more land when you had too much already?”
Lance Ramella, senior managing director for Hanley Wood Market Intelligence, a sister division of Builder, also notes the builders' desire to unload land in a market where property values are likely to further decrease from peak times.
“Acquisitions used to occur so that builders could add land to their inventory, now exactly the opposite is true,” Ramella says. “They'd love to add the [sales] volume, but not the land, but you can't do that.”SIGNS OF LIFE
News of BFC Financial Corp.'s January 31 announcement that it intends to buy Levitt Corp., the Ft. Lauderdale, Fla., parent company of Levitt and Sons, was quickly followed in March by reports that investor Carl Icahn made an offer to buy all of the common stock of WCI Communities, the Bonita Springs, Fla.–based home builder of mostly high-rise condos.
In late March, a far larger deal was announced with Taylor Woodrow, based in Solihull, England, and George Wimpey, based in Buckinghamshire, England, declaring a merger to create Taylor Wimpey, with combined annual revenue of $13.1 billion internationally. Wimpey currently builds in the U.S. under the brand Morrison Homes, which is No. 19 on the BUILDER 100. Taylor Woodrow ranks No. 32 on the list. Combined, the two builders would have 7,247 closings and gross revenue of $3.57 billion for 2006 in the U.S., making them the No. 15 builder on 2006's BUILDER 100.
Levitt and Sons ranks No. 50 on the 2006 BUILDER 100, but saw its closings fall 7.21 percent and announced in March that it sustained a net loss of $10.7 million for the fourth quarter of 2006 with net losses totaling $9.2 million for the year.
While Levitt has agreed to sell to BFC, Icahn's offer for WCI may just be the first salvo in what could be a long process, as he already announced plans to remove the company's entire board of directors, according to published reports. In early April, WCI's board fired back, urging company stockholders to reject the billionaire's offer. Icahn owned approximately 15 percent of the company's outstanding shares as of January. WCI ranks 40 on the BUILDER 100, but saw its closings decrease 23.86 percent and its revenue decrease 21 percent in 2006.