April 8 (Bloomberg) -- Pulte Homes Inc. agreed to buy Centex Corp. for $1.3 billion in an all-stock deal that creates the largest U.S. homebuilder by revenue and throws each of them a lifeline in the worst housing decline since the 1930s.

The first consolidation of publicly traded homebuilders since the bursting of the real estate bubble may also be the last because it’s easier to buy land than take on the troubles of rivals, said Ivy Zelman, a former Credit Suisse Holdings analyst who now runs her own New York-based research firm. The 13 largest U.S. homebuilders have lost 81 percent of their value since the July 2005 peak, according to Standard & Poor’s.

Centex, which initiated the sale, and Pulte are betting that by combining companies they will be better able to survive the longest housing slump since the Great Depression, with new home sales down more than 75 percent since their 2005 peak.

“This is really good because not only are there too many homes, there are too many homebuilders,” said Vicki Bryan, a senior high-yield bond analyst for New York-based Gimme Credit LLC. “Cash is king and this gives them $3.4 billion, the most in the industry, which means they don’t need the banks.”

Pulte agreed to pay 0.975 of a share for each Centex share, valuing Centex at $10.50, or 38 percent more than yesterday’s closing price, the Bloomfield Hills, Michigan-based company said today in a statement. The transaction, approved by both companies’ boards, includes $1.8 billion in net debt.

No Crystal Ball

An unexpected sales jump in February may signal the housing market is stabilizing, said Pulte Chief Executive Officer Richard Dugas in an interview.

“We’re not suggesting we have a perfect crystal ball but we’re cautiously optimistic about what we’re seeing now,” Dugas said. “The combination means we will return to profitability sooner than we would.”

The companies agreed to a deal after Centex lost 70 percent of its value in the past year and Pulte lost 30 percent. Pulte reported net losses for each of the last nine quarters and Centex has posted losses for the last seven quarters.

Dallas-based Centex rose $1.44, or 19 percent, to $9.06. Pulte fell $1.13, or 11 percent, to $9.64 at 4:15 p.m. in New York Stock Exchange composite trading.

“We’re not sold on this deal at all as far as Pulte is concerned,” Paul Puryear, director of real estate research at Raymond James & Associates Inc. in St. Petersburg, Florida, told Bloomberg TV. “For Pulte we don’t quite see the wisdom of stepping out and buying another 60,000 lots in this environment,” Puryear said.

‘Good Transaction’

For Centex, Puryear said, “it looks like a pretty good transaction to sell out essentially at book value.”

While Dugas and Centex CEO Timothy Eller didn’t predict a turnaround for the industry, builders have rallied in the past month on speculation lower mortgage rates will help the industry recover.

Fixed rates in the U.S. fell to a record low last week of 4.78 percent as the Federal Reserve ramped up purchases of mortgage-backed bonds to support home lending. Falling prices also lured consumers to buy new homes.

Purchases of new homes in the U.S. unexpectedly rose in February from a record low, increasing 4.7 percent to an annual pace of 337,000 after a 322,000 rate in January, according to the U.S. Commerce Department. The median sales price fell 18 percent from February 2008, the biggest year-on-year drop since records began in 1964.

59 Markets

The combined companies will sell homes in 59 U.S. markets, be called Pulte Homes and have its headquarters in Bloomfield Hills, Michigan, Dugas said.

Pulte gains access to Centex’s entry-level and first-time move-up buyers, a portion of the market that hasn’t been Pulte’s strong suit, Dugas said. Centex’s land position in Texas and the Carolinas, states with stronger new home sales, is also a positive, Dugas said.

“Neither one, if you look in an individual market, had a dominant share in many one of those markets,” Stephen Kim, senior real estate analyst with Alpine Woods Capital Investors in Purchase, New York, told Bloomberg TV. “When you put them together, however, you begin to achieve more of that local dominance which is so critically important in homebuilding.”

Dugas will take over as CEO and chairman of the new company while Eller will be vice chairman and a consultant for two years, Eller said in the interview.

Opportunities for Synergy

“We expect opportunities for synergy to be immediate,” Eller said.

Because of complementary geographic presence and market segments, the new company will save $350 million annually, Dugas said. That includes $250 million in overhead savings and $100 million in debt-expense relief, according to the statement.

Pulte and Centex brands will continue, the CEOs said. Pulte’s Del Webb brand for people 55 and over accounts for about half of the company’s sales.

The combined companies will have more than $3.4 billion of cash and a market value of $4.1 billion, according to the CEOs. Pulte shareholders would own about 68 percent of the new combined company and Centex shareholders would own 32 percent.

Dugas and Eller said that by being the first major homebuilders to merge they avoid the possibility of an incompatible combination in the future.

Eller said he approached Dugas about a merger two months ago because it was “the best way to create the best value for shareholders.”

‘Game Changer’

“I felt that by moving now we could choose our own partner and create the best combination in the industry,” Eller said. “It’s a real game-changer.”

Dugas said he responded to Eller’s idea immediately.

“We were very excited to talk to a partner we felt was the best strategic fit for Pulte in the industry,” Dugas said. “The combination of cultures was ideal. We believe it creates an unrivaled homebuilder. We’re very excited and the timeline is evidence of fact that both boards felt this was the right combination.”

Moody’s Investors Service, the New York-based credit rating company, placed both companies under review for a possible downgrade today. Moody’s said it will assess the land inventories, bank credit agreements and public note indentures of the two builders.

No More Deals?

Pulte has $3.17 billion of senior unsecured debt and a $1.2 billion unsecured loan, while Centex has $3.1 billion in senior unsecured debt and a $500 million unsecured loan, according to data compiled by Bloomberg.

“We don’t think it’s likely there will be further mergers,” Zelman, founder of Zelman & Associates, said in a conference call today. “We think buying assets today with stock is not a good idea. Why not just buy land instead of legacy assets?”

Citigroup Inc., Banc of America Securities, Merrill Lynch & Co. and JPMorgan Securities Inc. advised Pulte. Goldman Sachs & Co. advised Centex.

To contact the reporters on this story: Bob Ivry in New York at bivry@bloomberg.net; Brian Louis in Chicago at blouis1@bloomberg.net.

Last Updated: April 8, 2009 16:30 EDT