Will Centex Boost Pulte Homes?

Pulte CEO Richard J. Dugas Jr. hopes to gain efficiencies and profitability by putting the two homebuilders under a single corporate office

Some risk-takers hope to parlay weakness into strength as they build market share. When Pulte Homes (PHM) closes its $1.3 billion stock purchase of Centex (CTX) this fall, Pulte Chief Executive Richard J. Dugas Jr. will be running the nation's biggest homebuilder. While that's not much to brag about now, with homebuilding on hold, he's betting it will prove to be quite a calling card once recovery takes hold.

"Neither of us is profitable on a standalone basis," Dugas says. "Taking two well-positioned companies and eliminating the duplications of a corporate office and field overhead, we think, has the potential to help us become more profitable."

With housing so depressed, the latest earnings from the companies give little to cheer about. Pulte on May 5 reported a first-quarter loss of $514.8 million on revenues of $587.4 million, compared with a $696.1 million loss on $1.4 billion in revenues in the same quarter last year. Centex lost $402.8 million on revenues of $823.2 million in the same period, compared with a $910.5 million loss on revenues of $2.3 billion in the quarter last year.

A Marriage of Strength

There's a logic to Dugas' approach. He figures he will squeeze out some $350 million in annual savings by eliminating duplicate operations. What's more, the companies each bring about $1.7 billion in cash to the table, a hoard that the CEO figures will give them plenty of staying power to get through the current housing debacle.

Strategically, moreover, the deal has a clear appeal. The united outfit will marry Centex's strength in entry-level homebuilding with Pulte's power in the upper-end and "active adult community" markets. Dallas-based Centex also brings some raw land that over time could be a potent asset, some 60,000 lots that increase the total landholdings of the two companies to more than 159,000 lots. The merger also boosts the profile of Pulte, based in Bloomfield Hills, Mich., in the relatively healthy Texas and Carolinas markets. And, over time, Dugas figures that consolidation will be the dominant trend among hard-pressed homebuilders. He aims with this deal to get ahead of it.

But his bold move is hardly risk-free. Some critics, such as Seeking Alpha's Luke Johnston, suggest the marriage is a case of "when one plus one is less than one." Profitability, he believes, is a long way off. And investors are certainly cautious: After briefly boosting Pulte's stock price above 12 a share in recent weeks from 9.64 on Apr. 8, the day the deal was announced, shareholders have taken it down again to about 9.

Ultimately, Dugas' wager will prove to be a matter of timing. He will be able to claim success only if homebuilding turns around before the merged companies' money and the patience of his investors run out.

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