By Daniel Walker Guido
King of the hill. It's a position coveted by all of the nation's largest home builders. Reaching the pinnacle's peak rewards its conqueror unique access to credit, unrivaled economies of scale, unsurpassed name recognition, and unmatched bragging rights--at least until the next major acquisition by a competitor.
Having long cited the economic harmony a merger of two or more of the industry's five largest titans would bring, Wall Street has had to settle for multiple marriages of large- and medium-sized builders. As 2001 drew to a close, two more such mergers were announced. While many investors wrote off the housing industry following Sept. 11, the industry instead rallied, pulling out of the steep, but shallow, gulch in which it tumbled as traffic vanished from model home centers for a couple of weeks following the attacks.
By October, home buyers were back out in force. Sales surged, stock prices regrouped, consumer confidence increased, and mortgages moderated. With many reporting three- to six-month order backlogs, all systems were go for consolidations to once again lift off.
They did. In late November, Miami-based Lennar, ranked third on the 2001 Builder 100 list, announced it had signed an agreement to purchase Baltimore-based Patriot Homes for an undisclosed price.
And, in a move it expects will raise its 2002 Builder 100 ranking from 13 to eight, Hovnanian Enterprises of Red Bank, N.J., announced Dec. 19 that it plans a $240 million acquisition of The Forecast Group, a privately held, single-family builder based in Rancho Cucamonga, Calif. Hovnanian expects to outlay $225 million in cash and stock and assume $15 million in debt. The deal is expected to close this month. Forecast delivered 2,138 homes in California, producing $480 million in revenue and $74.5 million in pretax income in its 2001 fiscal year ending Oct. 31.
In January 2001, Hovnanian purchased Landover, Md.-based Washington Homes, ranked 32. By doing so, Hovnanian increased its leverage in Maryland, Virginia, and North Carolina. Shortly thereafter, "earnings per share surged 57 percent and average return on equity shot up seven points to 20 percent," says John Stanley, home building analyst for Wall Street investment bank UBS Warburg.
As the news broke of the newest Hovnanian acquisition, Stanley said he likes the deal because "it doesn't wreck Hovnanian's balance sheet, and it represents a logical expansion move. Fortunately, Hovnanian and its peers have a great record on those matters, unlike most industries."