Wednesday, home builder Pulte Homes, Inc. (PHM) announced a definitive agreement to buy rival Centex Corp. (CTX) in a stock-for-stock deal valued at $3.1 billion, including $1.8 billion of net debt, which could create America's largest homebuilding company. Subject to shareholder approval and the satisfaction of customary closing conditions and regulatory approvals, Pulte and Centex expect to complete the deal in the third quarter of 2009.
Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, Centex shareholders will receive 0.975 shares of Pulte common stock for each share of Centex they own.
The transaction, intended as a tax-free reorganization, has a value of $10.50 per Centex share, based on the closing price of Pulte stock on April 7, representing a premium of 32.6% to the 20-day volume weighted average trading price of Centex's shares.
Pulte noted that the combined company currently would have an equity market capitalization of $4.1 billion and an enterprise value of $7.2 billion. Upon the deal closure, Pulte shareholders will own approximately 68% of the new entity, while the remaining about 32% will be owned by Centex shareholders.
The company noted that certain officers and directors of both Pulte and Centex, including Pulte's founder and current chairman William Pulte, have agreed to vote their shares in favor of the transaction.
Bloomfield Hills, Michigan-based Pulte Homes, founded in 1956, conducts operations in 49 markets and 25 states, and has delivered more than 500,000 new homes since its beginning. Pulte Mortgage LLC is a lender offering Pulte customers a wide variety of loan products and superior service.
Dallas-based Centex, founded in 1950, also provides home building operations as well as mortgage and title services, and was ranked among the top three builders on FORTUNE magazine's list of America's Most Admired Companies for 10 straight years.
Commenting on the transaction, Pulte's president and chief executive officer Richard Dugas Jr. said, Combining these two industry leaders with proud legacies into one company puts us in an excellent position to navigate through the current housing downturn, poised to accelerate our return to profitability. Centex's significant presence in the entry level and move-up categories is complemented by Pulte's strength in both the move-up and active adult segments, the latter through our popular Del Webb brand.
In the calendar year 2008, Pulte and Centex delivered more than 39,000 closings with combined pro forma revenues of $11.6 billion. Pulte noted that the new entity will have the strongest liquidity position among its peer group with more than $3.4 billion of cash as of March 31, 2009. Pulte and Centex ended March with approximately $1.7 billion of cash each.
Upon completion of the deal, Dugas, Jr. will assume the positions of chairman, president and CEO of the new entity. Meanwhile, Centex's chairman and CEO, Timothy Eller, will join the new board of directors as vice chairman and will serve as a consultant to the company for two years following the close of the transaction.
Pulte noted that the board of directors will be expanded and will include four current members from the Centex board, including Eller, and eight members of the current Pulte board, including William Pulte. Dugas and Eller will hold a transition executive committee, to be set up for guiding and ensuring a successful transition.
The combined company will use the Pulte name and will be headquartered in Bloomfield Hills, and also plans to maintain a significant presence in Dallas, where Centex is centered. The combined organization will expand its geographic footprint to cover 59 markets, 29 states and the District of Columbia.
Centex's Eller said, We believe this is the right combination at the right time in the business cycle. By acting decisively now, we're creating unrivaled firepower to capitalize on the opportunities in homebuilding that are now becoming visible on the horizon. We will have a deeper and more expanded presence that we are confident will allow us to begin realizing the benefits of our combined scale immediately. Moreover, our shareholders will receive an immediate premium for their shares as well as participate in the upside potential of the combined company.
With the acquisition, Pulte said it expects that efficiency gains and other savings should generate cost reductions of about $350 million annually. This would consist of approximately $250 million in overhead savings and $100 million in debt expense relief, resulting from the expected retirement of debt maturities in excess of $1 billion prior to year-end 2009.
The company anticipates realizing a significant portion of the estimated cost savings during the first full year of operations after the deal closure, with the full amount realized by the third year. Pulte also expects to realize additional savings opportunities through production efficiencies and purchasing synergies.
In addition, Pulte said, as announced earlier, it is seeking approval at its 2009 annual meeting of shareholders of an amendment to its charter to restrict certain transfers of shares of Pulte common stock in order to preserve the tax treatment of Pulte's net operating losses and other tax benefits.
Pulte noted that its board of directors has amended its by-laws to incorporate transfer restrictions substantially similar to those reflected in the proposed charter amendment, as an additional measure to address any transfers that may occur prior to the adoption of a charter amendment.
In the transaction, Citi acted as lead financial advisor to Pulte, and Banc of America Securities, Merrill Lynch and J.P. Morgan Securities Inc. acted as financial advisors, while its legal advisor was Sidley Austin LLP. Goldman, Sachs & Co. acted as financial advisor to Centex and Wachtell, Lipton, Rosen & Katz acted as legal advisor.
In a research note on April 2, brokerage Credit Suisse downgraded its rating on Pulte shares to Underperform from Neutral with a price target of $10.
In early March, Credit Suisse downgraded its rating on Centex shares to Neutral from Outperform and lowered its price target to $7 from $12, based on increased concerns about the tough selling environment, not just that buyers aren't looking for homes, but that they will continue to gravitate to foreclosures and bypass the new homes.
PHM, which has been trading between a 52-week range of $6.49 - $17.32, settled at $10.77 on Tuesday, down $0.80, on a volume of 5.5 million shares.
CTX closed Tuesday's regular trading session at $7.62, down $0.67, on a volume of 4.6 million shares. In the past 52 weeks, shares have been trading in a broad range of $4.91 - $26.09.
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