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Who Will Buy?

J.P.Morgan seeks suitors for Taylor Morrison in a tough real estate climate.

For all the autumn buzz about U.K.-based Taylor Wimpey's plan to divest itself of North American subsidiary Taylor Morrison, a slow fourth quarter for home builder sales put a chill on a potential sale. However, new developments are afoot.

Taylor Wimpey chief executive Peter Redfern and Taylor Morrison CEO Sheryl Palmer have worked through 2010 toward a solution to rid the British company's balance sheet of the home building subsidiary, even bringing on J.P.Morgan consultants to explore alternatives. It would appear that the pair has a number of options—with sundry variations—to consider as the marketplace improves or gets worse on its way to an eventual recovery in the next 12 to 24 months.

From their vantage point, they may be motivated to do any of the following: spin the company off with an IPO; sell the company outright to a financial player, or, more likely, execute a club deal; sell the company to a home building competitor, or parse up the regions and sell to multiple builders; or allow Palmer to take the operation private via a leveraged buyout with a private equity player.

J.P.Morgan recently tested the market's acquisition appetite, inviting a first round of potential buyers to submit a bid for the U.S. subsidiary by year-end. According to executives familiar with the process, about half of the organizations J.P.Morgan invited to bid actually put in a bid. Sources close to the company indicated that there will probably be several additional go-rounds of bid invitations on the road to making one of the deals stick.

However, for all the possible deal structures, the big hurdle to get any of them closed is that with the housing market struggling at large, home builder stocks are still getting hammered. But if recovery gains a toehold as the spring selling season moves into full swing, momentum for a deal could build quickly as Taylor Morrison's land holdings become more desirable.

While timing still remains an issue, there is no shortage of interest in the entity. A deal with Taylor Morrison represents three distinct value propositions that may very well make a bid worth the $1 million or so in due diligence costs:

THE LAND Roughly 14,000 lots make up the lion's share of Taylor Morrison North American assets. A pretty healthy chunk of which are raw or partially finished lots that would require additional investment not only to get them into an inventory churn but also to realize maximum return on the assets. In addition, a significant portion of the lots are located in Arizona and Florida, which represent both short-term struggles and long-term opportunity.

THE OPERATION Taylor Morrison has an intensely lean overhead structure that blends a high-end land planning and design culture with a merchant-builder bang-'em-out ethic. This combination has made the company a feisty operational competitor in its respective arenas.

THE MARKETING EDGE The company has a lot of equity in its brand, which, arguably, connotes upper market quality and attention to design.

Many of the public builder players have sniffed at this deal, and it's rumored that at least one private home building operating company had submitted a bid. However, with a scarce few private home builders with the capital to make such a sizeable acquisition, it's possible that the private builder bidder in question is the Canadian owner of Mattamy Homes—which has been in expansion mode through the downturn and which has a sizeable residential towers and commercial business in Canada.

U.S.-based Shea Homes, which underwent a recent recapitalization, could also be a candidate for Taylor Morrison, according to some industry observers, who conjecture that Shea might team up with a private equity or hedge fund player as a way of monetizing the assets in the lead-up toward recovery.

Yet many parties assert that the heavy lot concentration in Arizona and Florida, the number of raw lots versus finished lots, and the Canadian Monarch division, which focuses on developing high-rise product, make Taylor Morrison an overly complex, if not a too big, pill for a builder to swallow right now.

For this reason, many industry stakeholders are guessing the acquirer is more likely to be a financial player with longer-term return horizons. The usual suspects include private equity firms such as Starwood Capital, hedge fund billionaire John Paulson's Rain Tree Investment Corp., or GoldenTree InSite Partners, which have been aggressive in both land buys and builder investments.

In a sense, some of the urgencies and the motivations around the sale of Taylor Morrison will base themselves more on how sensitized a potential buyer is to the tipping point in home buyer demand. If it's not going to materialize in 2011, then the raw lot pipeline and complexity around reselling a segment like the Canadian operation become obstacles for those who have more immediate business motivations, i.e., the public home building companies. —John McManus