MEGADEAL: Pulte chairman, president, and CEO Richard Dugas expects the merger to be complete by the third quarter of 2009.

'A Game Changer'

Pulte Homes to buy Centex Corp. in $1.3 billion deal.

Transforming itself into the nation's biggest home builder, by far, was only a secondary motivation behind the early April blockbuster deal that would merge Pulte Homes and Centex Corp. Rather, the primary spur behind the megadeal was finding a way to put more “P” in the P&L.

“This isn't about bigness,” asserted Richard Dugas, the 43-year-old chairman, president, and CEO of the merged company. “It's about profitability and shareholder value.” This merger, he added, positions the company with “unmatched liquidity.”

Centex's former chief Tim Eller, who will serve as the new Pulte vice chairman for the next two years, called the deal “a game changer” that has the potential to alter the housing industry's competitive landscape. Together, Pulte and Centex generated $11.4 billion in revenue and closed more than 39,000 homes in 2008. That is nearly double the volume and 60 percent more closings than what its now-nearest rival, D.R. Horton, produced last year.

The deal, which requires stockholder and Securities and Exchange Commission approval, would be an all-stock transaction. Pulte would pay $1.3 billion in stock to purchase Centex, which at the equivalent of $10.50 per Centex share is a 38 percent premium over what Centex's stock was trading.

Dugas said he expected to put the merger to shareholder vote within the next two months. If all goes according to plan, the merger would be complete by the third quarter. Centex shareholders would own 32 percent of the new company, and there would be four Centex representatives on Pulte's 12-person board.

The merger happened faster than just about anyone could have anticipated.

“I am always surprised when a big deal happens,” said Meritage Homes CEO Steve Hilton. “But, for over a long period of time, there has always been talk of the marrying of big builders.”

But for others, the deal is more of a reflection of the current market conditions. “I think it's just confirmation of the obvious–that the world doesn't need as many builders as we have in the United States,” said Standard Pacific CEO Ken Campbell. “If we had half as many builders, there would still be plenty of competition and enough houses built.”

Eller said his board of directors had been looking at Centex's survival prospects for several months. Despite aggressively liquidating land and other non-core assets, he said Centex only formally approached Pulte about a possible merger a few months ago.

Eller called Pulte the “optimal partner.” Both companies have flirted with vertical integration of manufacturing and distribution. Both place great importance on their respective J.D. Power ratings for customer service. And their operations are set up about the same way, with strong divisional components, he pointed out.

However, the real fit came from the builders' balance sheets.

According to Dugas, the merger would allow Pulte to retire more than $1 billion of the combined company's debt through synergies and cost cutting. This spells more head count reductions, he conceded.

The deal also is expected to eventually save $250 million in corporate and field overhead expenses and another $100 million in debt-related interest expense. Pulte CFO Roger Cregg noted these savings probably wouldn't be fully realized until the third year of the merger.

Both Dugas and Eller said bringing Pulte and Centex together would “accelerate” the company's return to profitability, “regardless of the housing recovery,” according to Eller.

This deal adds another $1.8 billion to Pulte's balance sheet, and the combined company has more than $6.2 billion in home building debt. However, it also moves forward with $3.4 billion in cash and market capitalization of $4.1 billion. The company's debt-to-cap ratio is at 60 percent, but Cregg said the goal is to get that down to the low 40 percent range.

In terms of market share, the merger would give the new Pulte a significant lift, in terms of closings, in Atlanta, Chicago, Dallas, Indianapolis, and Raleigh, N.C. It also would make Pulte among the top three builders in 25 of the top 50 markets in the country.

Pulte would expand its reach to entry-level and first-time move-up buyers, which have been Centex's core customers. Active adult, which before the merger accounted for 45 percent of Pulte's annual closings, would represent only 29 percent of the new company's closings, with entry-level closings taking the lead at 32 percent.

The timing of this deal raises the question of whether it could precipitate others.

“I don't think this is indicative of any future transactions,” said Hector Calderon, a vice president at JMP Securities and an M&A expert. “There aren't a lot of easy or logical transactions to be had out there.” —BIG BUILDER staff

Day Two Take Industry analysts weighed in on Pulte's acquisition of Centex in early April, offering insights on what the deal means to the pro forma company's balance sheet and the industry at large.

“We are concerned that the company will remain saddled with land that could prove to be a drag on returns if volume does not substantially improve and wonder whether buying legacy assets underwritten by another party is the highest potential return on investment.” —Ivy Zelman, Zelman and Associates

“Getting with Centex helps [Pulte] in land, gets them into the entry-level market, and gets them better volumes. ... Overall, it is a good fit culturally and geographically.” —Stephen East, Pali Capital

“This transaction is not a prelude to increased M&A activity for the industry, in our view. Specifically, we believe most builders will continue to be highly focused on maintaining high cash balances, lowering net debt-to-cap ratios, and reducing land supply.” —Michael Rehaut, JPMorgan

“We believe CTX simply ran out of runway to accomplish its ambitious goals. ... Rather than subject the company to further stresses, CTX sold, and we believe the decision to do so was a courageous, thoughtful one.” —Carl Reichardt, Wachovia Securities