The Miami-based Lennar Corp., the second-largest home construction company in the U.S., is set to take over the No. 1 spot.
Lennar is acquiring Virginia-based CalAtlantic Group, it said Monday. The $9.3 billion deal — announced as a merger, though Lennar management would take the lead — would give the combined company a top-three position in 24 of the largest metropolitan statistical areas (MSA) in the U.S. Together, the two companies have 2017 revenues of $17 billion and a total market capitalization of $18 billion. Both companies are publicly traded.
Analysts think the merger could be a boon to prospective homeowners, as well as Miami’s growing profile as a hub for serious business.
“As Miami continues to mature as a major MSA nationally and internationally, you’re going to see more firms based here emerge as best in breed among national and international players,” said Charles J. Foschini, senior managing director at the mortgage brokerage firm Berkadia. “Lennar is a great example of this. Their ability to acquire a firm that will put them in the No. 1 seat is not a surprise to people in the real estate industry.”
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Foschini said a merger of companies of the size of Lennar and CalAtlantic results in an economy of scale that allows the new, larger entity to buy bigger quantities of materials at a lower cost.
The deal would give the combined company control of 240,000 home sites and 1,300 active communities in 49 markets across 21 states. It includes $3.6 million of assumed debt and will be comprised of 80 percent stock and 20 percent cash.
“Our overall company size and local critical mass will yield significant benefits through efficiencies in purchasing, access to land, labor and overhead allocation to a greater number of deliveries,” Lennar CEO Stuart Miller said in a statement. Miller would continue as CEO of the combined entity.
The marriage is projected to generate annual cost savings and synergies of $75 million in fiscal 2018 and $250 million in fiscal year 2019.
“Your ability to negotiate for lumber, key plumbing supplies — whatever the components of a home are — is strengthened,” Foschini said. “The more you buy, the more you should be able to control the price of that raw material. That puts you in a better position to then offer that economy of scale to the end user.”
Mark Vitner, a senior analyst with Wells Fargo, says the deal could be a sign that Lennar is bullish about the sluggish housing market. According to the U.S. Census, new single-family home construction in September hit 1,127,000, which was up 6.1 percent year-over-year but still down 4.7 percent from August.
“The volume of new construction is much lower than we would typically see in a recession,” Vitner said. “As a result, builders have had to become much more efficient and manage their costs. Sometimes a merger helps to do that. That seems to be one of the points Lennar and CalAtlantic are touting. Home builders are trying to get as cost-efficient as possible. If you can spread your costs across a larger base, you can lower the cost of building each home.”
Current CalAtlantic shareholders will receive an 0.885 share of Lennar Class A common stock, which was priced at $51.34 per share on the New York Stock Exchange on Oct. 27. The deal translates to a 27 percent premium on CalAtlantic’s closing price that same day. Current CalAtlantic stockholders will own approximately 26 percent of the combined company.
Dallas-based D.R. Horton is currently the biggest home builder in the U.S., with $12.3 billion in revenues in 2016, according to the industry website Professional Builder. Lennar is No. 2 with $9.5 billion, while CalAtlantic is fourth with $6.3 billion.
Monday, Lennar shares closed down just over 4 percent, at $55.68. CalAtlantic shares closed up 21.3 percent, at $49.07.