Reasons to be skeptical of the Pulte Homes-Centex merger

Well, say what you want about Pulte Homes (PHM) CEO Richard Dugas but don’t accuse him of buying high. Sure, offering $10.50 a share (in all-stock deal) for home building competitor Centex (CTX) is about $3 a share more than yesterday’s Centex price but it’s less than half what Centex shares fetched a year ago and more like 1/8 of what they traded for at the height of the housing bubble. Centex also has about $1.7 billion in cash – less than the total $1.3 billion initial purchase price. A steal? Not exactly. Centex also had $3.1 billion of debt and a balance sheet filled with cratering real estate and mortgage loans.

Dugas is betting that eliminating overhead in the combined companies to the tune of $350 million a year and a joint cash hoard of $3.4 billion will allow the newly-created entity to withstand the current tough times and flourish when real estate recovers. It’s a big bet that Centex will end up being worth more than the net $1.8 billion of debt Pulte is taking on (after subtracting the cash). And further write-offs could be ahead for Centex’s $3.3 billion of housing projects in development and almost $500 million of undeveloped land (as of Dec. 31).