Transforming itself into the biggest home builder in the United States was not the primary motivation behind the blockbuster deal that would merge Pulte Homes and Centex Corporation.
“This isn’t about bigness,” asserted Richard Dugas, the 43-year-old chairman, president, and CEO of the merged company, whose corporate name will be Pulte Homes, and which now operates in 59 markets in 29 states and the District of Columbia. “It’s about profitability and shareholder value.” This merger, he added, positions the company with “unmatched liquidity.”
Dugas and Tim Eller, Centex’s former chief who will serve as Pulte’s vice chairman for the next two years, spoke this morning with BUILDER and BIG BUILDER shortly after the two giants made their surprise announcement.
The deal, which requires stockholder and SEC 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% premium over what Centex’s stock was trading for.
Pulte expects to put the merger to shareholder vote within the next two months, according to Dugas. If all goes according to plan, the combination would be complete by the third quarter of this year. Centex shareholders would own 32% of the merged company, and there would be four Centex representatives on Pulte’s 12-person board.
Centex's Eller 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% more closings than what its now-nearest rival, D.R. Horton, produced last year.
The merger also would give the new Pulte market leadership, in terms of closings, in Atlanta, Chicago, Dallas, Indianapolis, and Raleigh, N.C. It is among the top three builders in 25 of the top 50 markets in the U.S., among them several markets—Phoenix, Las Vegas, Cape Coral, Fla., and Riverside-San Bernardino and Sacramento, Calif.—that have been particularly hard hit by the economic and housing downturns.
The merger is also expected to give Pulte access to markets in Texas and the Carolinas where it previously has lacked a significant presence, a new advantage emphasized by Dugas and Eller in a teleconference with analysts this morning. In addition, Pulte will also be able to expand its reach to entry-level and first-time move-up buyers, which have been Centex’s target customers. “This is a very attractive demographic that we think has a long runway,” Eller said about entry-level buyers.
This shift will change Pulte's product mix as far as closings. Pulte executives told analysts today that active-adult, which before the merger accounted for 45% of Pulte’s annual closings, now represents only 29% of the new company’s closings, with entry-level closings, at 32%, taking the lead.
Dugas told BUILDER and BIG BUILDER that Pulte intends to “segment” its brands—Pulte, Del Webb, Divosta Homes, Centex and Fox & Jacobs Homes—to target different customer groups. “In the past, the ‘Pulte’ brand was stretched out over several customer segments. The view here now is that we can build brand awareness by leveraging each of them differently," the Pulte CEO said. Eller added that the brands are “very complementary” and will allow the merged company to “leapfrog” and gain share in markets that are most likely to recover the soonest.
Neither Dugas nor Eller would comment about whether Pulte is considering exiting any markets, or where it might reduce redundancies in markets where the two companies’ home building operations overlap, which is pronounced in certain markets in California and Florida.
For industry watchers, this merger announcement invites many questions. Is housing finally coming out of its doldrums? Will the Centex-Pulte combination ignite merger and acquisition activity that has been mostly dormant during the downturn? Does this deal really change anything, especially when one considers that Pulte and Centex are both smaller than they were only a few years ago?
Maybe yes, maybe no, depending on the source.
“I think it’s just a confirmation of the obvious that the world doesn’t need as many builders as we have in the United States,” said Ken Campbell, CEO of Standard Pacific Homes. Bob Toll, chairman of Toll Brothers, agreed, saying that consolidation “is the natural path” for the industry and suggesting that the Pulte-Centex combination could spur more merger-and-acquisition activity.
The principals at Pulte and Centex, full of pre-merger bliss, have no question that this is the right deal at the right time. Eller today called Pulte the “optimal partner” and described the builders as “the two most similar companies in the industry.” Both companies, for example, 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.
“It was a natural combination,” observed Steve Hilton, the CEO of Meritage Homes in Scottsdale, Ariz., a public buidler that will now face a more powerful Pulte in several Southwestern markets. “It was an inevitable transaction and a win-win for both.”
Industry watchers have hinted, from time to time, that the two companies might make a good marriage. But the merger happened faster than just about anyone could have anticipated and with barely a whisper of rumor preceding it.
Eller said his board of directors had been looking at Centex’s survival prospects for several months and had considered a number of alternatives. It could be argued that by aggressively liquidating land and other non-core assets that Centex was positioning itself to become more attractive to a potential suitor.
(Centex’s “asset lite” business model differs from Pulte’s, which has focused on holding land through the downturn. Of the 189,452 lots that will be controlled by the new combined company, 120,796 were Pulte’s before the deal. However, much of the Centex-controlled land is finished lots that Dugas said can be monetized more quickly to generate cash flow.)
As part of that process, Centex formally approached Pulte about a possible merger two months ago, according to Eller. And, as Dugas noted, “we acted very quickly.” Both companies concluded that the fit could work, and Dugas said that Pulte felt it needed to be “proactive, to survive and thrive” once the housing market revives.
Dugas said he is convinced “without question” that Pulte and Centex are stronger as one entity. But he conceded that simply getting larger doesn’t automatically make the merged company more viable. What the merger will do, he explained, is allow Pulte to retire more than $1 billion of the combined company’s debt through synergies and cost cutting (that will include a reduction in head count, he acknowledged). The company expects to eventually realize annualized savings of $250 million in corporate and field overhead expenses, and another $100 million in debt-related interest expense.
It might save even more. The company has not yet factored in how much it might save by combining its purchasing, although Dugas said confidently “you can bet that we’re going to benefit from our combined purchasing power.”
However, Dugas and Eller both said that bringing Pulte and Centex together would “accelerate” the company’s return to profitability “regardless of the housing recovery,” according to Eller.
In terms of debt, this deal does add another $1.8 billion to Pulte’s balance sheet, and the combined company has $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-capitalization ratio is now at 60%, but Pulte CFO Roger Clegg said the goal is to return that to the low 40-percent range.
John Caulfield is senior editor at BUILDER magazine. Teresa Burney and Lynn Norusis, senior editors at BIG BUILDER magazine, contributed reporting.
