Pulte Homes
, the fourth-largest U.S. homebuilder, said it would buy the third largest, Centex Corp , for $1.3 billion in stock as it looks to save costs and get through the housing downturn.

The deal, which Pulte said would create the largest U.S. homebuilder, calls for the exchange of 0.975 common shares of the 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. The proposed price is also 37.8 percent above Centex's closing price on Tuesday.

Centex shares jumped 28 percent to $9.75 in early New York Stock Exchange trade on Wednesday, while Pulte fell 3.6 percent to $10.38. Moody's placed the ratings of both Pulte and Centex under review for downgrade.

It's 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.

Experts predict more strategic stock-for-stock deals this year in distressed sectors, as they help companies reduce costs while allowing shareholders to benefit when conditions improve. With such transactions, companies in struggling industries can bulk up without having to deplete much-needed cash or trying to raise scarce and costly debt financing.

You have both weakness in sales and write downs on land and existing inventory of houses, Shilling said. All these things are putting pressure for consolidation in the industry.

At Tuesday's close, the S&P Homebuilders Select Industry Index <.SPHOME> was down nearly 10 percent so far this year.

Pulte, which would take on $1.8 billion of Centex debt, will own about 68 percent of the combined company. It said it would realize annual cost savings of about $350 million from the deal and expects to retire more than $1 billion of debt maturities before the end of this year.

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 pro forma revenues of $11.6 billion. The combined company would have had more than $3.4 billion of cash as of March 31, 2009.

The deal would allow Pulte to return to profitability more quickly, Chief Executive Richard Dugas said on a conference call.

Dugas expects further consolidation in the industry. The deal would put Pulte and Centex in a stronger position because they acted first, he added.

Dugas will be chairman and CEO of the combined company. The boards of both companies have approved the deal, which is expected to close in the third quarter.

Citigroup acted as lead financial adviser to Pulte, with Banc of America Securities , Merrill Lynch and JPMorgan Securities Inc as financial advisors. Sidley Austin LLP acted as legal adviser.

For Centex, Goldman, Sachs & Co was financial adviser, and Wachtell, Lipton, Rosen & Katz was legal adviser.

(Reporting by Christopher Kaufman, Paritosh Bansal and Ed Krudy; Editing by Lisa Von Ahn)