Lennar Corporation (NYSE: LEN and LEN.B) and CalAtlantic Group, Inc. (NYSE: CAA) are betrothed, looking to create what the former claims will be the nation’s largest home builder, surpassing D.R. Horton by revenue but, according to one analyst, not by home completions. Shares of Lennar were trading down 3.8% toward the end of the session Monday as CAA shares soared more than 22% on heavy volume.
In an agreement announced early Monday, Lennar stated that the respective boards of directors have unanimously approved a definitive merger agreement under which each share of CalAtlantic stock will be exchanged for 0.885 shares of Lennar Class A common stock in a transaction valued at approximately $9.3 billion, including $3.6 billion of assumed debt. (Read BUILDER’s John McManus analysis).
The combine will create the nation’s largest home builder with the last twelve months of revenues in excess of $17 billion and market cap of approximately $18 billion. The combined company will control approximately 240,000 home sites and will have approximately 1,300 active communities in 49 markets across 21 states with approximately 50% of the U.S. population.
Lennar said it expects the transaction will generate annual cost savings and synergies of approximately $250 million, with approximately $75 million achieved in fiscal year 2018.
Under the terms of the merger agreement, each share of CalAtlantic stock will be converted into the right to receive 0.885 shares of Lennar Class A common stock. Based on the closing price of Lennar’s Class A common stock on the NYSE on October 27, 2017, the implied value of the stock consideration is $51.34 per share, representing a 27% premium to CalAtlantic’s closing price that same day. CalAtlantic’s stockholders will also have the option to elect to exchange all or a portion of their shares for cash in the amount of $48.26 per share, subject to a maximum cash amount of approximately $1.2 billion. On a pro forma basis, CalAtlantic stockholders are expected to own approximately 26% of the combined company. The transaction is expected to close in the first calendar quarter of 2018.
Stuart Miller, Lennar CEO, said, “This combination increases our scale in the markets that we already know and in the products we already offer to entry level, move up and active adult customers. As a result, the combined company will have a top 3 ranking in 24 of the top 30 markets in the country.”
“Accordingly, our overall company size and local critical mass will yield significant benefits through efficiencies in purchasing, access to land, labor and overhead allocation to a greater number of deliveries. The combined land portfolio will position the company for strong profitability for years to come, as we continue to benefit from a solid home building market, supported by job and wage growth, consumer confidence, low levels of inventory, and a production deficit.”
Larry Nicholson, President and CEO of CalAtlantic, said, “Our combination with Lennar underscores the quality and attractiveness of the CalAtlantic brand and people, and the business our talented team has worked hard to build. Lennar is a well-respected name in the home building industry and their team shares a deep commitment to innovation, quality, integrity and a focus on a superior customer experience.”
Rick Beckwitt, President of Lennar, said, “We have great respect for what Scott Stowell, Larry Nicholson and the CalAtlantic team have accomplished, building upon the rich legacies of Standard Pacific and Ryland. Our discussions over the last several months have only reinforced our conviction that by joining forces, we will achieve new heights in our industry and create significant value for all of our shareholders. We share common cultures and deep traditions of delivering quality and value, doing the right thing and exceeding the expectations of our customers. We look forward to executing our strategy as a larger and even stronger company and welcoming a very talented group of CalAtlantic associates to the Lennar family.”
The transaction is subject to approval by Lennar and CalAtlantic stockholders. Stuart Miller and the Miller Family Trusts have agreed to vote their 41.4% voting interest in Lennar in favor of the merger. MP CA Homes LLC, an affiliate of MatlinPatterson Global Opportunities Partners III L.P., has agreed to vote its 25.4% voting interest in CalAtlantic in favor of the merger. Additionally, MP CA Homes has agreed to exercise the cash election for at least the number of shares to cause the maximum cash consideration amount to be fully subscribed by electing stockholders. Any cash election by MP CA Homes will be subject to proration into shares of Lennar Class A common stock, along with all other stockholders of CalAtlantic, who elect cash, if the number of cash elections by CalAtlantic stockholders exceeds the maximum cash amount. Upon completion of the transaction, Mr. Stowell, CalAtlantic’s Executive Chairman, will join the Lennar Board of Directors.
According to Freedonia Group analyst Cara Brosius, the deal will create the largest home builder in the United States by revenue; however, the combined company is expected to rank behind DR Horton in housing completions.
“In our recent Focus Report on US housing, we found that the number of participants in the housing industry has shrunk amidst merger and acquisition activity,” said Brosius in a research note. “During the housing bubble, the number of home builders and residential remodelers increased rapidly, reaching a peak of about 200,000 firms in 2005. However, the housing crisis caused many firms to exit the industry or consolidate. More robust credit standards, along with the availability of existing homes for sale, have continued to hinder revenues, discouraging many new firms from entering the industry. By acquiring one of its largest rivals, Lennar is significantly expanding its market share. The acquisition will solidify its position as the US’ second largest homebuilder, increasing its number of housing completions by over 50%. In 2016, DR Horton was the largest homebuilder by this measure.”
Furthermore, noted Brosius, the purchase offers Lennar the ability to increase its housing sales through organic growth, as CalAtlantic serves some Northeast and Midwest markets that Lennar does not share, such as Chicago, Delaware, Indiana, and Philadelphia. “The Northeast and Midwest regions, although expected to experience slower growth in housing completions than the rest of the US, provide Lennar with opportunities to enter new markets and expand upon CalAtlantic’s current operations.”
Borsius said Lennar’s purchase of CalAtlantic will decrease its competition in fast-growing markets such as Seattle, Washington. CalAtlantic entered the Seattle market in June 2017 via the purchase of Oakpointe’s homebuilding operations. Through the upcoming acquisition, Lennar will obtain the Bridges housing community of single-family homes in Auburn, as well as developing communities Emerald Pointe and Maple Hills in Puyallup and Covington, respectively.
The US housing industry is highly fragmented and thus very competitive, noted Brosius. “However, the largest home builders have considerable advantages in many markets because of horizontal and vertical integration. Some home builders control much of their supply chain for fixtures, building products, and transportation. Additionally, mergers and acquisitions may allow large companies to dominate the housing market in certain regions. Firms such as Lennar can see sales increases by purchasing competitors with shared markets. For instance, in January 2013, NVR, which was the largest home builder in the Pittsburgh, Pennsylvania area, acquired Heartland Homes, its biggest competitor there. This purchase allowed NVR to assert further dominance in the Pittsburgh housing market.”
