As housing worsens, builders merge to survive

Pulte Homes, Inc. (PHM) and Centex Corporation (CTX), two of the largest home builders, are merging. It remains to be seen whether this move will save the companies during what is perhaps the worst downturn in the market in over a century.

The companies announced that they had entered a definitive merger agreement under which Pulte and Centex will combine in a stock-for-stock transaction valued at $3.1 billion, including $1.8 billion of net debt.

The combined revenue for the two companies, looking back at their results for the last year, is about $11.6 billion. The firms claim that their balance sheet will be the best in the industry with $3.4 billion in cash.

But Centex is viewed as a very weak company. Its shares are off well over 60% in the last year, which is much worse than most of its peers. That raises the question of whether Pulte can get enough cost savings out of the merger to make the transaction worth the risk of taking on a such a troubled partner.

The other significant headwind facing the companies is that the price of real estate continues to drop and there is new evidence that deliquencies and foreclosures are continuing to rise, even among non-subprime borrowers. That could make the viability of any firm in the industry questionable.

Nice merger, but still a lot of risk.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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