Real estate development company Forestar Group's (NYSE:FOR) stock is rising today because homebuilder D.R. Horton (NYSE:DHI) made an offer to buy 75% of the company for $16.25 per share in cash. Under the deal, Forestar would remain a publicly traded company in order to maintain its access to capital. Forestar had previously agreed to be bought out in its entirety by Starwood Capital Group for $14.25 per share.
So, naturally, Forestar's stock price jumped to close to the level of the buyout offer. As of this writing, the stock was trading for $15.90 per share.
The main story here is what the buyout means for D.R. Horton. Specifically, why would D.R. Horton try to outbid Starwood Capital to acquire Forestar, especially since doing so represents a roughly 25% premium to the stock's price before it accepted Starwood's offer in April?
Forestar is a development company that owns or has interests in 50 residential or mixed-use projects with about 4,600 acres of real estate. The company's business is conducting project planning and management activities that relate to the development of new communities.
Generally speaking, the reason that companies pay a premium to acquire other publicly traded companies is that the acquirer's management team feels that the acquisition target has a higher value to them. This value can be in the elimination of a key competitor, proprietary technology or, in the case of Forestar, a value-adding portfolio of buildable land.
Homebuilders are currently operating at low margins, which are being especially hurt by high land acquisition costs. The acquisition of a 75% stake in Forestar greatly expands D.R. Horton's land and lot portfolio, as well as its future land development capabilities, which could lead to higher profit margins for America's No. 1 homebuilder.
Donald Horton, chairman of D.R. Horton, said that "we believe that D.R. Horton is uniquely positioned to make Forestar the country's leading residential land development company."