Well, the idea makes sense at some levels. Pulte Homes intends to trade 0.975 shares of its own stock for every share of Centex outstanding, in a move that values the latter at about $10.50 -- not bad for a stock that fetched $7 and change Tuesday. In exchange, Pulte receives $5.3 billion in annual revenues, $1.4 billion cash, and "sizable [land] holdings in both Texas and the Carolinas." It also gets a company grossing an 11-cent loss on every dollar of sales (versus Pulte's own 2-cent loss) and carrying $3.3 billion in debt.
Although Pulte plays up the positive aspects of this deal -- the creation of the nation's largest homebuilder, with "the strongest liquidity position among its peer group," and the usual promised "synergies," there are a few drawbacks as well.
Regarding liquidity -- $3.4 billion is certainly more cash than D.R. Horton (NYSE: DHI ) , Lennar (NYSE: LEN ) , or Toll Brothers (NYSE: TOL ) possesses individually, so Pulte's statement is true as far as that goes. But the combined Pulte-Centex will also carry $6.8 billion in debt. Thus the new powerhouse will also have the heaviest debt position "among its peer group." That will put Pulte at a disadvantage relative to MDC Holdings (NYSE: MDC ) and NVR (NYSE: NVR ) , both of which boast more cash than debt.
Spinners aren't winners
What's more, spin as it might, Pulte's still failing to address the root cause of its problems: a glut of foreclosed homes that's dampening new-home sales, depressing prices, and hurting profits. Across the country, foreclosed homes -- some just a couple of years old -- compete with nearly identical new homes priced 20% higher. New-home sales are down dramatically as a result. It's lovely to hear Pulte opine that it sees a recovery "visible on the horizon," but I wonder how far away this horizon is.
A better idea
The Federal Reserve is doing its level best to save the housing industry. But government can't do all of the work. Instead of "creating unrivaled firepower to capitalize on the opportunities in homebuilding" tomorrow, Pulte needs to stop the meltdown today.
Rather than issue $3.1 billion in stock to acquire Centex, Pulte might be better off using the shares to raise cash for other purchases. Consider: With the average U.S. home now priced at $170,000, $3.1 billion could pull 18,235 foreclosed homes off the market -- nearly as many as Pulte sold over all of 2008.
Picking its battles could have further salutary effects if Pulte picks its targets -- taking the foreclosed house down the street off the market, for example, rather than acquiring empty lots in South Carolina. The difference: Instead of hoping to profit from a recovery in the homebuilding market, Pulte could actually be doing something to make it happen.