Two Firms to Merge, Form Largest Home Builder

Pulte Homes announced yesterday that it plans to buy Centex in a $1.3 billion all-stock transaction that would create the nation's largest home builder, in an attempt to position itself to pull through the housing downturn with plenty of cash.

The combination of two of the nation's largest home builders, both of which have a large Washington-area presence, marks the industry's first major consolidation since the housing market softened. It signals Pulte's conviction that the market is poised for a rebound, analysts said yesterday.

Pulte hopes to navigate its way through a battered housing market by saving $250 million a year on duplicate overhead, which should help it avoid burning through its trove of cash, executives at both companies said yesterday. As of March 31, the two builders had a total of $3.4 billion in cash, dwarfing the reserves of their rivals. Pulte plans to use the money in part to repay more than $1 billion in debt by year's end and buy land if it needs to once the market recovers.

"This is the beginning of a smaller housing industry with more powerful players," said Dan Fulton, an independent researcher who tracks the building industry and used to work at Pulte.

The boards of both companies approved the deal, which is expected to close in the third quarter. If it does, the new company would be based at Pulte headquarters in Bloomfield Hills, Mich., and use the Pulte name. Consumers who are currently buying homes from either builder should not face disruptions as the deal is ironed out, officials said.

Centex shares closed at $9.06 yesterday, up 18.9 percent, while Pulte's stock fell 10.5 percent, to $9.64. Shares of some other builders rose, including Lennar, K. Hovnanian and Beazer.

Under terms of the deal, shareholders of Dallas-based Centex would receive 0.975 shares of Pulte stock for each share of Centex. Pulte valued the deal at $3.1 billion, including $1.8 billion in debt. Pulte shareholders would own about 68 percent of the company.

Centex approached Pulte about the deal months ago, and the firms agreed that a merger was the fastest route back to profitability, Timothy Eller, Centex's chief executive, said in an interview yesterday. "We get a jump-start on the rest of the industry."

The acquisition would increase Pulte's presence in the much-sought-after first-time-buyer market, where Centex is a big player. These are the buyers who don't have to sell a house to buy a house, so builders are chasing them.

As a stand-alone company, about 45 percent of Pulte's assets are active-adult communities built by Del Webb, which Pulte acquired in 2001, said Richard J. Dugas Jr., Pulte's chief executive. Only 17 percent of Pulte's assets catered to first-time buyers.

After the merger, 29 percent of Pulte's market presence would be in the active-adult community and 22 percent in the first-time buyer category, said Dugas, who would head the merged company.

Together, the two companies would operate in 59 markets in 29 states and the District. But for the most part, their geographic spread overlaps, said Bob Curran, the lead home-building analyst at Fitch Ratings.

In the Washington-Baltimore area, Centex was the third-largest builder in terms of home sales last year, after Ryan and K. Hovnanian, according to Hanley Wood Market Intelligence, a market research firm that tracks builders. Pulte came in sixth.

When the real estate market weakened, builders got stuck with too many houses and too much land, in part because jittery buyers frantically canceled contracts. To cope, builders trimmed prices and offered all sorts of incentives.

But their troubles deepened with the mortgage market's meltdown and the ensuing foreclosures, which added to an already bloated supply of homes for sale. Builders stopped buying land and started dropping options for future purchases.

Still, many private builders of all sizes could not survive. Through this purchase, Pulte is doing what it can to avoid a similar fate and better position itself in the coming years, said Lawrence J. Horan, a longtime industry observer.

"The two have $3.4 billion in cash, so they can weather a fairly good storm and be in a position to take advantage of a market where a lot of competitors have disappeared or have been financially weakened," Horan said.

"The fact that they are merging makes it look like more verification that the market is bottoming," he said.