This year is likely to go out as a particularly slow one for market share consolidation. However, according to what KB Home CEO Jeff Mezger told investors at a UBS Investment Bank conference in New York today, the pace is poised to quicken in 2008. Bankruptcies and company or divisional closures will trigger some strategic plays for market share from better-capitalized companies. And with roughly $1.8 billion of free cash sitting on its balance sheet and nothing drawn on its $1.5 billion revolver, Mezger said he expected KB to be one of them.
Although some builders come relatively cheap these days--more than a few are in distress and looking for white-knight sales to stay in business--Mezger said he'll be looking to grow KB more organically than by M&A activity. While the company has operations in 36 of the top home building markets, it holds just a 4% market share on average in those markets, which Mezger said "positions us for potential future growth." In fact, he estimated that by simply growing market share in its current operations, management could "literally double the size of our company" without expanding its geographical footprint.
Mezger said he's not afraid to invest in any of the company's existing geographic areas but is waiting for more clarity in the housing market. In fact, he has been biding his time, holding on to the company's wallet. "We think land prices have been too sticky," Mezger told investors. "[The potential to pick up parcels at more attractive prices] will be greater as some of these privates or land developers get squeezed."
Mezger is a firm believer that there's always room in home building for the small builder; it's just that the downturn may take its share of casualties. Lenders are increasingly applying pressure on smaller companies to make good on their debts, which is likely to leave fewer private players when the downturn subsides. "We've seen a lot of small privates close their doors or sell their assets," Mezger said. "And from what we understand from our banks, there'll be more coming."
And that means fire sales and liquidations could make for attractive acquisitions. However, when exactly land prices will buckle remains the question. While there's still uncertainly in the market as it struggles to find a bottom, one thing remains clear in Mezger's mind: "There will be more market share consolidation coming out of this thing," he said.