PULTEGROUP, INC. 
By 
By Ilaina Jonas
The deal between No. 2 U.S. homebuilder Pulte
Pulte and Centex have reported net losses for 2007 and 2008. The merger would allow the combined company, which would called Pulte, to return to profitability sooner than they could as stand-alones, the chief executives of both companies said on conference call with analysts.
Alpine Mutual Funds senior analyst Stephen Kim said he thought the deal was very good. "You're talking two companies that are both very large. This is a deal that is going have a pretty significant impact."
The U.S. housing market has been in a steep decline for about three years, which has contributed to the deep recession in the United States.
Home prices in some markets are down more than 40 percent. Although new home sales rose 4.7 percent in February, they did so from low levels, foreclosures are still rising and financing remains tight.
"We know that the housing market will rebound at some point and ... we are cautiously optimistic that we are beginning to see the early signs of housing stabilization," Pulte Chief Executive Richard Dugas said in a conference call. "However, it's not enough for us simply to wait for the recovery to occur."
Dugas said that traffic of perspective buyers in the first quarter was up from the prior quarter.
Shares of Pulte were down 11.6 percent, or $1.25, at $9.52 in late afternoon trade on the New York Stock Exchange. Centex shares were up 18.4 percent, or $1.40, at $9.02.
The deal prompted Fitch Ratings to affirm Pulte's BB-plus rating, the highest junk grade, and placed Centex' debt on Rating Watch "positive", saying the company would ultimately benefit from Pulte's credit profile.
The merger would result in about $350 million in annual savings from job cuts, other cost reductions and debt relief, the companies said. They expect to retire more than $1 billion of debt maturities by the end of the year.
Based on 2008 closings, Builder magazine ranked Pulte No. 2 and Centex No. 3. The combined company would control 189,452 lots.
"Essentially, what they bring to one another is the ability to scale back," University of Maryland economics professor Peter Morici said in an interview with National Public Radio. "Homebuilding is not a terribly complex business, and there's too much capacity."
Centex has a strong position in the first-time buyer and second-time home buyer market. Pulte is strong in upgrades from first homes, and, through its acquisition of Del Webb in 2001, builds "active adult" communities for younger retirees.
Geographically, the merger melds Centex's strength in the Dallas and Carolina markets with Pulte's position in the Northeast and Midwest. It would put Pulte in the top three position in 25 of the top 50 U.S. markets.
DEAL OFFERS LARGE PREMIUM
The deal calls for the exchange of 0.975 common shares of the combined company for each share of Centex, valuing the acquisition at $10.50 per share.
The companies said that represented a premium of 32.6 percent over the stock's 20-day average price and 37.8 percent above Centex's closing price on Tuesday.
"It's a pretty normal consolidation in a very troubled industry," said Gary Shilling, president of investment research firm A. Gary Shilling & Co. "It's exactly what you'd expect. These companies are obviously in big trouble."
Some experts predict more strategic stock-for-stock deals this year in distressed sectors. With such transactions, companies could grow without depleting much-needed cash or trying to raise financing in a tight credit environment.
"You have both weakness in sales and writedowns on land and existing inventory of houses," Shilling said. "All these things are putting pressure for consolidation in the industry."
But Kim said the merger was unique because Centex was undervalued. He does not think that a rash of mergers will follow.
Pulte, which would take on $1.8 billion of Centex's debt, would own about 68 percent of the new company.
Based on current prices, the combined company would have a market capitalization of $4.1 billion and a presence in more than 59 markets across the United States, Pulte said.
Last year, Pulte and Centex delivered more than 39,000 closings with combined proforma revenue of $11.6 billion. The combined company would have had more than $3.4 billion of cash as of March 31, 2009.
Dugas will be chairman and CEO of the company, which will be based in Bloomfield Hills, Michigan, where Pulte is headquartered.
The boards of both companies have approved the deal, which is expected to close in the third quarter.
(Additional reporting by Christopher Kaufman, Paritosh Bansal and Ed Krudy and Ilaina Jonas; Editing by Lisa Von Ahn)
(Reporting by Ilaina Jonas; Editing by Toni Reinhold)
