After Wall Street had an overnight to chew on the details of the proposed $1.3 billion aqusition of Centex Corp. by Pulte Homes Inc., the deal began to look as much a shotgun wedding as a marriage made in heaven.
The take on day two from several analysts: Centex lacked the cash to complete its move from a large-scale land developer to a land-light home builder and Pulte, with its significant exposure to the active-adult market, needed to move deeper into the first-time home buyer space, which is expected to be the first new-home market to recover, more rapidly that it could have on its own. The thought was that Pulte could have been in danger of burning through its cash while waiting for its traditionally higher-end markets to recover or by investing in an expansion of its current entry-level operations.
"We think the root cause of the combination was a desire to expand Pulte's entry-level housing presence since first-time and first-move-up neighborhoods have historically not been the company's strong suit," wrote James McCanlesss, senior analyst at FTN Equity Capital Markets. He surmised that the recent positive-if-tentative news on the housing markets "may have spurred a seemingly defensive but potentially proactive reaction by Pulte if entry-level housing sales improve in FY09 versus FY08."
Analysts also cited the $3-plus billion in cash the combined entity will have on hand as a major driver of the deal. With that war chest, the new Pulte should be able to bankroll new construction in its expanded first-time home buyer segment, generating cash flow that it would not have been possible with its current product mix.
On the other side of the deal, Centex, with nearly $1 billion in debt maturing before 2012, was seen as running on empty.
"In essence, we believe CTX simply ran out of runway to accomplish its ambitious goals," Carl Reichardt, home building analyst for Wachovia Securities, wrote in a research note. "We believe management had to realistically analyze the risk that its shift would not be successful, with a heightened chance that either balance sheet, execution, or the cycle could derail it and compress share price further. Rather than subject the company to further stresses, CTX sold, and we believe the decision to do so was a courageous, thoughtful one."
Others expressed concern over the price paid for land. "While we can understand the strategic re-positioning and synergies Pulte hopes to obtain by acquiring Centex's strong presence in the entry--level market and geographic diversity in Texas and the Carolinas--we are concerned about the timing and implicit price Pulte is willing to pay for land assets in this environment," wrote Buck Horne at Raymond James. "With banks, lenders, and creditors virtually choking on distressed land assets currently, we believe it is only a matter of time before even 'A' quality land soon becomes available at very attractive prices."
Horne, however, noted, perhaps a bit waggishly, "We do acknowledge, though, that those banks are unlikely to accept PHM shares as currency for land transactions."
Several analysts also noted that Centex assets will be revalued under fair-value accounting rules, but there was disagreement on what that might mean. FTN's McCanless expressed concern: "No impairment estimate was provided on yesterday's call, but with industry absorptions persistently slower-than-expected and national housing prices declining, we believe impairments could exceed our combined $1.94 billion estimate if all of Pulte's and Centex's assets are evaluated for potential impairment."
On the other side was James Wilson at JMP Securities. "The pickup of CTX's properties at a relative bargain (the acquisition price is in line with present book value) enables PHM to add to its portfolio at prices that are near bottom," he wrote. "Centex had already impaired 38% of its peak inventory, and while we have modeled additional impairments going forward, we anticipate that the worst of the pain is over and therefore we do not see considerable downside risk to Pulte on that front."