For the three diversified, global financial interests who teamed together officially last night to ante up 1.04 times book value for Taylor Wimpey PLC’s North American operations, the clock sets at zero hour at the end of May on just under a $1 billion bet.
That’s when the $955 million purchase of Taylor Morrison’s U.S. operations and Monarch Homes’ Canadian operations by TPG Capital, Oaktree Capital Management, and JH Investments is set to close.
Sheryl Palmer, Taylor Morrison president and CEO, tells Big Builder she expects near term that it’s "business as usual" and that the deal affirms her team’s management strategy, its low-overhead structure, its hybrid merchant builder-land developer operational model, and above all, its land position in challenged, but high-potential Sun Belt markets.
The new owners, for whom the transaction—facilitated by J.P.Morgan as financial advisor to Taylor Wimpey PLC—gives them a buy-low, sell-higher platform, will decide all of that after they get time on the board of the new entity, which will retain the current brand names Taylor Morrison in the United States and Monarch Homes in Canada.
It’s too soon to tell whether they’ll look at the next stretch of months as a time to offer a vote of confidence to current senior management or bring in fresh blood; to expand capital resources for investment, or stay away from adding debt while the operation’s U.S. divisions tread close to negative cash flow as it is.
Their goal, as financial players, is to make money, and they’ll get a bit of a tailwind on that objective right out of the shoot since Monarch Homes, one of the Top 5 home builders in Ontario, Canada, is making money, and Taylor Morrison is said to be about break-even.
Beyond the present moment, as Canada’s hot home building cycle is widely expected to lose steam and the U.S. market is equally widely expected to make at best an anemic go at gaining steam, the three financial partners have to figure that their entry point is just about as good as they’re going to get.
In the macro housing context, a billion dollar mergers and acquisitions transaction affirms that cyclical forces of housing will sooner or later reassert themselves despite a number of profound housing finance policy-related issues hovering in the atmosphere that fundamentally could change the demand universe over the next five years.
For now, though, TPG, Oaktree, and JH Investments (which is parent to a Western Canada-based real estate and home building operator called IntraCorp) wanted into the possibility that one-time book value could easily ride cyclical traction to one-and-a-half or two times book value within the next two or three years.
While both strategic (home builder operators) and financial (private equity and hedge fund) players indicated a strong interest in the Taylor Wimpey North American assets, financial players prevailed--i.e., bid higher at the end of the day--because their return timelines allow for a bit more play at the outset than the crop of today’s land-prudent public home builder operators can afford to be.
"Non-strategics are going to pay more for this now because they want a platform," commented an executive familiar with such transactions. Strategics--i.e., home building companies who are already up to their eyeballs in land "opportunities" and are wringing their hands over when and how what is obviously pent-up demand will begin to manifest itself--were less willing to value the 14,000-lot asset package at about $70,000 per lot.
For private equity and hedge fund players, there’s real money in being able to front a big play for an even bigger return that could come relatively quick if the cycle behaves as industry veterans believe it should.
Do TPG, Oaktree, and JH have an exit timeline? According to an executive who’s qualified to give such a characterization, the answer is, "Yes, but ..."
In fact, the answer is, "It could be five years or it could be five minutes, it’s just a matter of how fast they make their money."
John McManus is editorial director of Big Builder.