Pulte/Centex deal being watched for recovery signs

CHICAGO (Reuters) - The move by Pulte Homes to snap up smaller rival Centex Corp and create America's largest homebuilder is likely to spawn other deals in a ravaged industry at the epicenter of the worst U.S. downturn in decades.

Deals like this could provide bargains for stronger operators like Pulte, but few see the all-stock $1.3 billion acquisition as anything more than another sign of how badly the sector has been beaten up in the past three years.

"The deal is a sign of where we are in the cycle for the homebuilding industry," said Alex Vallecillo, senior portfolio manager with Allegiant Asset Management, which has $28 billion in total assets under management. "For Pulte, this is about cutting costs to survive the downturn, while Centex needs to salvage some kind of value from the company."

"The telltale signs point to this being a sale out of stress rather than any other reason," he added.

In a conference call after the deal was announced, Pulte executives said that while the worst housing crisis since the Great Depression is not over, the end may be in sight.

"We know that the housing market will rebound at some point," Chief Executive Richard Dugas said. "In fact, we are cautiously optimistic that we are beginning to see the early signs of housing stabilization."

Analysts are more cautious about calling a bottom to a market where buyers are short in supply and homes are not.

"I don't know if I would call it a bottom, but things have gotten so bad they have reached the point where they are unsustainably bad," said Parrish Glover, an equity analyst at Morningstar. "It's hard to see housing declining much more unless we all want to start living in caves."

If the market has reached a bottom and land values are stabilizing, then Pulte's gamble on Centex could pay off when recovery comes.

NYSE: 'THE CHEAPEST PLACE TO BUY LAND'

Morningstar's Glover said the land owned by Centex has a tangible book value equivalent to $20 a share, which if realized is nearly double the $10.50 per share value of the company's acquisition by Pulte.

"Pulte has realized the cheapest place to buy land is on the floor of the New York Stock Exchange," Glover said.

What is even better for Pulte is that it used stock rather than cash to acquire Centex, he added.

More such stock-for-stock deals are expected this year. Such deals allow buyers to cut costs while allowing shareholders to benefit when the market eventually picks up.

"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."

UBS analyst David Goldberg said in a research note that "historically, M&A in homebuilding has accelerated coming out of downturns, as more liquid builders look to take advantage of strategic opportunities to build their market share."

"We expect this trend to hold in this cycle, especially as smaller private builders look to exit the industry," he added.

Goldberg added that declines in housing supply, improving consumer sentiment and the U.S. government stimulus plan should create a "trough in housing" in the second half of 2009.

"We think this should contribute to improving profitability into 2010," Goldberg wrote.

BUYING WEAKNESS?

If Darwin's theory of evolution -- survival of the fittest -- were applied to U.S. homebuilders, then the surviving companies would be the ones with the fittest balance sheets.

Builders with weaker balance sheets -- analysts mention Beazer Homes USA Inc, Hovnanian Enterprises Inc, Meritage Homes Corp and M I Homes Inc -- may be inclined to follow Centex's lead and shop around for buyers.

"It's entirely possible that there are some homebuilders in or around bankruptcy that are being shopped around as I speak," Allegiant's Vallecillo said.

Credit Suisse analyst Daniel Oppenheim, however, wrote in a client note that "we see few other companies trading at a discount and being a willing seller at this time."

"Lower quality balance sheet companies also have change in control provisions that would make a transaction much more difficult," he added.

Stephen Kim, senior real estate analyst for the Alpine Mutual Funds, said he was worried the acquisition of Centex could "force" another homebuilder into making a deal.

He identified DR Horton Inc as a company that could potentially overreact to the Centex deal.

"That is a builder that has historically touted the merits of being No. 1," Kim said. "Moreover, they've had a strong and long history of acquisitions. I think that's the reason why the stock is down today."

(Reporting by Nick Carey; Additional reporting by Ilaina Jonas; Editing by Patrick Fitzgibbons, Gary Hill)