Lennar Makes Deal for Cal Atlantic as Home Builders Face Challenges
The home-building sector in the United States has faced an array of challenges, including natural disasters, a long-running labor shortage and increased regulatory costs. Now, two of the nation’s biggest residential-construction companies are merging in hopes that their combined heft will help them counter those forces.
The Lennar Corporation said on Monday that it would merge with the CalAtlantic Group to form America’s largest home builder in a stock-and-cash deal worth $5.7 billion. The deal would create a behemoth with around 240,000 building plots in 21 states, a market value of about $18 billion and combined revenue of $17 billion over the past 12 months.
Lennar and CalAtlantic anticipate reaping $250 million in annual cost savings and paying down debt obligations. But the deal will not alter a basic problem: The construction of new homes in the United States lags below historical averages.
A decade after the big housing bust dealt a blow to many smaller home builders, the industry’s largest firms continue to grapple with higher regulatory expenses that make building homes — especially starter homes — too costly, some housing-finance experts said. The situation confounds some people, given the pressing need for affordable housing for young families.
Laurie Goodman, a director of housing-finance policy for the Urban Institute, said the nation suffered from a “huge supply shortage” of new single-family homes.
“The underlying structural problem is we are not building enough homes and homes are costly to build,” Ms. Goodman said. “We all agree that more things should be handicapped accessible and new homes should be hurricane proof, but there is a cost associated.”
Right now, the home-building industry is dealing with a new cost: the impact of natural disasters, including Hurricanes Harvey and Irma in the South and devastating wildfires in Northern California.
New construction in the South fell 9.3 percent last month, largely because of the hurricanes. And housing starts across the country declined 4.7 percent to 1.127 million units in September, a low for the year.
Eventually the damage caused by the hurricanes and fires in California could lead to a surge in construction in a handful of states. But finding the workers to build those homes could be a challenge.
Six in 10 home builders had trouble attracting the right workers during the third quarter of the year, according to a survey published last month. Another 30 percent said they had moderate difficulty finding such workers.
By merging, Lennar and CalAtlantic hope their size will help them achieve “efficiencies in purchasing” and gain “access to land, labor and overhead allocation,” Stuart Miller, Lennar’s chief executive, said in a news release.
“The combined company will have a strong balance sheet and generate significant cash flow available to pay down debt and repurchase shares,” Mr. Miller said.
Ralph McLaughlin, chief economist with Trulia, an online residential real estate listing firm, said he hoped the merged companies would eventually use their heft to increase production of new homes.
“At face value, I was very excited to hear about this merger because inventory is hovering near historic lows, and that hurts home buyers and renters very hard,” Mr. McLaughlin said. But, he said, he was then disappointed to learn that the intent, for now, “was not to ramp up production but to gain efficiencies that will be used to pay down debt.”
Under the deal’s terms, CalAtlantic shareholders would receive 0.885 Lennar shares for each CalAtlantic share. That would equate to $51.34 a share, a 27 percent premium above CalAtlantic’s closing price on Friday. The transaction values CalAtlantic at $9.3 billion, including debt.
CalAtlantic shareholders also have the option to take all or a portion of their shares in cash, at $48.26 a share. The cash payments would be limited to a total of $1.2 billion, Lennar said.
On completion of the transaction, CalAtlantic shareholders are expected to own about 26 percent of the combined company. The deal is expected to close in the first quarter of 2018, subject to shareholder approval.
Mr. Miller and his family trust, which hold a 41.4 percent voting interest in Lennar, and MP CA Homes, an affiliate of MatlinPatterson Global Opportunities Partners that holds a 25.4 percent voting interest in CalAtlantic, have agreed to support the deal, the companies said.
Citigroup and the law firm Goodwin Procter advised Lennar; J. P. Morgan and the law firm Gibson, Dunn & Crutcher advised CalAtlantic.
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