Although Fed taper angst and a couple of underwhelming late entrants in home building's initial public offering beauty pageant have cast a pall over equity investor enthusiasm in the waning days of August, all is not quiet in home building's dog days landscape.
Bidders are jockeying for advantage on two game-changing home building crown jewels--the five-piece Weyerhaeuser portfolio of home builders with a reported total of 27,000 lots and California-based Shapell Homes, with an estimated California lot pipeline of 5,000--as the race to lock in land supply for housing's continued recovery in the coming 12 to 36 months heightens the stakes.
We're hearing price tags of upwards of $3 billion for the Weyerhaeuser group, and from $1 billion to $1.5 billion for the Shapell package.
Top line, the competition to buy the Weyerhaeuser five-operator package and Shapell's Golden State goldmine will play out as a classic smack-down between strategic behemoths and global financial private equity and hedge fund giants.
Since the sellers in both cases--Weyerhaeuser's deal is being fronted by Citigroup Inc. and Morgan Stanley and Shapell is working with Lazard Freres & Co.--are radio silent and locked into confidentiality clauses on the bidding, BUILDER PULSE will take a stab educated conjecture in identifying potential most-likely candidates among strategic and financial players for the two mega-deals.
First let's have a look at what the Weyerhaeuser group is all about, and what it would mean for a strategic acquirer. Of interest is the question of why the group may only be available as a package. Broken up into pieces, we believe, would probably fetch an even more impressive roster of potential bidders. Trendmaker Homes, for instance, would attract interest from a number of privately held Texas-based builders, as would any one of the other Weyerhaeuser regional powerhouses.
Still, what we're hearing is that they're being offered as a group only, so we'll only look at strategic acquisition candidates who might be able to absorb the $3 billion or so it would take to land the entire prize.
Here's the six key reasons a strategic buyer would be interested in the Weyerhaeuser group:
1. The ability to acquire 2014 and 2015 lots for a known dollar figure
2. Additional scale in markets one already operates in
3. Removal of a competitor--both for home buying customers and future land, materials, and labor acquisition
4. Incremental sales
5. Operational process improvement
Here, again, is a look at the Weyerhaeuser footprint:
Let's run through the whys, wherefores, and how-this-may-make-sense in alphabetical order, so that no one may presume I have inside information into what will actually transpire:
- D.R. Horton: typically, Horton looks to grow organically, but acquisitions in the current environment would quickly give America's top-volume builder a first- and second-time move-up position that it could use, given entry-level sensitivities to interest rates, student debt burdens, a slow jobs recovery, etc.
- Lennar Homes: a deal-maker nonpareil, Lennar's M&A chops are as good as they get, and the higher-end land and product line positioning mentioned above would be a plus for Lennar right now, as it's entry-level focus may be prone to interest rate and mortgage credit access volatility in early legs of recovery
- PulteGroup: ceo Richard Dugas covets a third leg of the company's positioning stool to go along with the Del Webb active adult enterprise: a luxury brand to complement Centex for entry level, and Pulte for the mid-level. Now that Pulte has quieted critics on its ability to absorb Centex, the moment may have come for the next big play.
- Ryland Homes: Ryland is a long-shot. Land-light, the Weyerhaeuser group probably is too much too soon, but the company has been acquisitive of late and may be a darkhorse in the running
- Standard Pacific: another long-shot, the sense of a StanPac play is that the Weyerhaeuser operations are so culturally similar to StanPac's. What's more major stakeholders MatlinPatterson, which saved StanPac from death in 2007, may see this as a monetization moment they can't say no to.
- Taylor Morrison: fresh from an IPO, Taylor Morrison is another far-fetched possibility... partly because the focus needs to be on performance and delivery on expectations in its current business model. But it probably has the wherewithal, and the match is pretty strong culturally and position wise.
- Toll Brothers: the Toll-er-verse would be nicely expanded with the Weyerhaeuser brands, and the culture would work. Too, Toll is antsy to expand its California activity, which is a higher profit-margin, stronger jobs growth geography. This makes Toll a strong candidate not only for the Pardee and Quadrant Homes segments, but for the Shapell Homes assets as well.
- TRI Pointe: backed by Starwood Capital's Barry Sternlicht, never-say-never about a possible TRI Pointe coup. The growth spurt would be much faster than the brain-trust of Doug Bauer, Tom Mitchell, and Mike Grubbs would have mapped, but they're young and hungry to be No. 1 in the game.
We're hearing the deal on the Shapell package is an all-cash transaction, and that it could come within days or weeks. The Weyerhaeuser deal has tax accounting complexities--it would possibly entail a Reverse Morris Trust, whereby parent company Weyerhaeuser would complete a spin-off of subsidiaries to the parent company's shareholders. Under Internal Revenue Code section 355, this could be tax-free if certain criteria are met.
This could mean that a phased-asset take-down plan could be set up with the acquirer.
Stay tuned. We'll have more on this in the days ahead.