Pulte Homes Inc. announced Wednesday that it has agreed to buy the Dallas home builder Centex Corp. for $1.3 billion in stock.
The acquisition would create the largest U.S. home builder by revenue and would serve as a lifeline for both companies in the worst housing slump since the 1930s.
Pulte, of Bloomfield Hills, Mich., said it agreed to pay 0.975 of a share for each Centex share, valuing the stock at $10.50 a share, or 38% more than Tuesday's closing price. The transaction was approved by both companies' boards and includes $1.8 billion in net debt. It is expected to close in the third quarter.
Vicki Bryan, a senior high-yield bond analyst based in Corrigan, Tex., for the New York fixed-income research firm Gimme Credit LLC, said the move "is really good, because not only are there too many homes, there are too many home builders. Cash is king and this gives them $3.4 billion, which means they don't need the banks to survive."
Pulte and Centex are betting that by combining they will be better able to survive the housing decline. Buying Centex also would give Pulte access to states with stronger new-home sales, including Texas and the Carolinas. The combined company is to use the Pulte name and have its headquarters in Bloomfield Hills.
The acquisition would put Pulte "in an excellent position to navigate through the current housing downturn, poised to accelerate our return to profitability," Richard Dugas, its chief executive, said in a press release. "Together we will have considerable presence in more than 59 markets across America."
Home builders' shares have rallied in the past month on speculation that lower mortgage rates will help the industry recover.
As of March 31 the companies had more than $3.4 billion of cash and their market value totaled $4.1 billion.
Pulte shareholders would own about 68% of the company and Centex shareholders would own 32%.
Dugas would take over the companies and hold the positions of chairman, president and CEO, the companies said.
Timothy Eller, the chairman and CEO of Centex, would become a board member of the new company and a consultant.
Centex shares have fallen 70% in the past 12 months, while Pulte is down 30%.
The Standard and Poor's Supercomposite Homebuilding Index is down 45%.
Pulte has reported net losses for each of the last nine quarters, and Centex has posted losses for the last seven quarters.
The investment banking units of Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. advised Pulte on the deal. Goldman, Sachs & Co. advised Centex.