George S. May Business Blog

Pulte and Centex pull off massive tie-up

A combination of a pair of home builders made headlines this morning on Wall Street.

Centex will be bought by Pulte Homes in a $1.3 billion, all-stock deal that will create the nation’s largest homebuilder. Pulte Chief Executive Richard Dugas, said he although he is confident the deal will accelerate a return to profitability, the buy out will ultimately result in a workforce reduction.

“It allows us to not only survive, but thrive in any economic climate,” he said.

Pulte shares lost 4% Wednesday morning. Centex shares were down over 5%, The Mortgage Bankers Association’s weekly measure of loan applications climbed 4.7% in the latest reading, and its purchase index jumped 11.1%, compared to just a 3.2% increase in refinancing.

This deal “is a game-changer, pure and simple,” said Centex Chairman and Chief Executive Timothy Eller, who will become Pulte’s vice chairman and will work as a consultant for two years following the acquisition’s completion.

Pulte and Centex were definitely in need of a “game-changer” as the two have been experienced a slide in profits for quite some time now. Pulte lost almost $3.73 billion over the past two years, more than wiping out all of its profits for the prior three years. Centex lost $2.66 billion last year, erasing its earnings for the prior four years.

Integrating Centex’s operations will save Pulte $350 million a year. Pulte will have $1.8 billion in debt and cash reserves totaling $3.4 billion. Pulte has said that they will be able to pay off $1 billion in debt by the end of the year.

The Pulte-Centex tie-up will create a behemoth of a company as it’s revenue will be over twice of the next largest rival, D.R. Horton Inc. Pulte and Centex together pulled in $11.61 billion in the last year, while D.R. Horton collected $5.82 billion.

Pulte is offering Centex shareholders 0.975 shares of its common stock for each share of Centex that they own. The transaction is valued at $10.50 per Centex share based on Pulte’s Tuesday closing stock price of $10.77. That represents a 38 percent premium to Centex’s closing price of $7.62 Tuesday.

Pulte stockholders will own about 68 percent of the combined business and Centex shareholders will own the remaining 32 percent.

Shares of Centex soared $1.81, or 24 percent, to $9.44, while Pulte stock sank 82 cents, or about 7 percent, to $9.95.

Centex had approximately 124.4 million shares outstanding for the quarter ended Dec. 31, 2008.

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