Price of Transaction

Appx. # of Lots Exchanged

The long-rumored sale of Dublin, Ohio-based Dominion Homes was finally announced on Monday morning with Atlanta-based PulteGroup acquiring the one-time public builder.

In 2013, Dominion, which operates in Columbus, Louisville and Lexington, was the 46th largest home builder in the United States with 857 closings and revenue of approximately $168 million, according to the BUILDER 100. Pulte was the third-largest builder with 17,766 closings and revenue of $5.7 billion. The combined closings would have put Pulte at No. 2 on last year’s BUILDER 100. Pulte also reeled in 6,500 lots from Dominion with another 1,600 under due diligence review.

“In purchasing Dominion's real estate portfolio, we acquired a number of well-located communities and immediately establish PulteGroup among the top builders in three new markets: Columbus, Louisville and Lexington, two of which are top 50 home building markets in the US," said Richard J. Dugas, Jr., Chairman, president and CEO of PulteGroup in a statement. "Dominion's land pipeline expands our Midwest operations into three top metro markets, and gives us a great platform for further investment and growth. We are also pleased to have Dominion CEO Keith Tomlinson, a former Pulte employee, and his team join our organization as we deliver an exceptional consumer experience to homebuyers in these markets.”

Dominion currently operates in 38 communities. Adding those communities (to Pulte’s 589 communities), gives Pulte a 3.8-percent year-over-year third quarter community growth.

“While not heroic, we note this will be the first quarter of year-over-year community growth for PHM [Pulte] in 29 quarters,” said Stephen East, partner and senior managing director of ISI Housing Research.

Though no sales price was announced, Wells Fargo, in an analyst note, said that Pulte had almost $1.2 billion in cash at the end of June, which it believes provides ample liquidity for the purchase. East estimates the 6,500 lots came in between $125 million to $150 million. He also indicated that Dominion had roughly a $200,000 annual sales price in 2013, which compared to Pulte's $306,000 figure.

“Should PHM continue generating community growth over the next few quarters, we believe a headwind against the equity lifts with a path to an improved relative valuation,” East said in the note.

Analyst Reaction
Wells Fargo’s Adam Rudiger liked the fact that Dominion was dominant in its hometown of Columbus with 673 closings and 23.9 percent of the market share. In fact, more than 80 percent of its sales came from the nation’s 33rd largest housing market. Public M/I Homes, another local builder, ranked second in the market with 502 and 17.8-percent market share. The Columbus Dispatch reported that Centex Corp. (which was acquired by Pulte), Toll Brothers, and Beazer Homes took runs at central Ohio in the past but were unable to unseat Dominion or M/I Homes.

“We've long favored companies with deep local market share, so we view an opportunity to gain a commanding position in a large market positively,” writes Rudiger. “Further, PHM has excess liquidity in our view, so this acquisition provides the company with an immediate way to acquire assets that can contribute to earnings and revenue. Guidance says that the acquisition should be accretive to both earnings and return on invested capital. In terms of size, Dominion's revenues in 2013 approximated three percent of PHM's, so in our view, the acquisition is relatively modest, that does little to change our view or investment thesis of PHM.”

East calculates that Dominion adds about 5 percent to Pulte’s annual closings, assuming a continuation of Dominion's 850 closings in 2013. The acquisition should bolster Pulte’s North Region closing by roughly 25 percent.

“Generally, we view the acquisition favorably as it allows PHM growth potential for what appears a rational price,” East wrote. “PHM has done a tremendous job changing its profitability profile, but has struggled to take advantage of the industry's volume recovery. We believe this acquisition helps, providing immediate order growth and should be viewed as a substitute for organic community growth.”

In the early 2000s, Dominion was a Top 30 builder nationally, hitting 3,070 closings (which put it at 27 on the BUILDER 100) and $563 million in revenue in 2002. But it ran into problems around the middle of the decade. Still it was closing 1,736 homes in 2005 and 1,105 homes in 2006.

In 2008, that number fell to 403, as it was taken private by a group including companies affiliated with Angelo Gordon & Co., Silver Point Capital, and the builder's largest shareholder, BRC Properties, after facing a series of problems. Tomlinson took the helm of the company in 2011. The sale gives the company’s equity investors an exit after watching Dominion recover over the past couple of years.

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