Stock decline cuts value of Pulte, Del Webb deal

Wednesday, May 2, 2001 | 11:07 a.m.

SUN STAFF AND WIRE REPORTS

Pulte Homes' stock fell 9.15 percent Tuesday to $42.50, its biggest one-day drop since August 1998, as investors digested its deal to acquire home-building giant Del Webb Corp.

Originally valued at $1.8 billion, the value of the deal declined to $1.77 billion on Tuesday's decline in the price of Pulte stock. The stock was down another 7 cents this morning.

The stock value of the deal declined from $40.51 per Del Webb share to $39 per share Tuesday as some analysts expressed concern about the $1 billion in Del Webb debt that Pulte will assume. Despite the decline, analysts generally praised the deal and said that after it's completed it should immediately increase Pulte's profits.

"It's a smart move. The attraction for Pulte is the very lucrative active-adult market, and the attraction for Del Webb is Pulte's balance sheet," said Sam Lieber, manager of the Alpine International Real Estate Fund.

Pulte, based in Bloomfield Hills, Mich., is paying stock for Del Webb. The stock value of the deal was a 15 percent premium to Del Webb's closing price on Monday. Del Webb stock rose $4.60 Tuesday and was up another 10 cents this morning.

The purchase fills a key gap in Pulte's product line and gives Pulte a major foothold in developing retirement, or so-called "active adult," projects across the country like Del Webb's Sun City communities in the Summerlin and Henderson areas of the Las Vegas market.

Of the 27,781 homes Pulte built last year in 41 markets in four countries, less than 5 percent were active adult units.

If the deal is completed as expected in three months, Pulte can better tap into the nation's aging population. According to the U.S. Census Bureau, there will be 74.7 million people aged 55 and older in 2010, up from 56.9 million in 1998.

Combined, Pulte Homes and Phoenix-based Del Webb are projected to generate more than $6 billion in revenues in the United States. Each company has about 5,000 employees, and executives said they expected minimal layoffs to result from the deal -- though the assumption of Del Webb's debt is likely to lead to cost-cutting measures like combining offices in overlapping cities and gaining price breaks based on higher volume from suppliers.

Del Webb is currently selling homes in 10 active adult developments in the United States, including Hilton Head in South Carolina, Palm Desert in California, Sun City Grand in Arizona and Anthem in Henderson. More than 50 percent of Del Webb's developments, or 8,419 homes built last year, are targeted toward people aged 55 and older.

The company, founded by namesake Del Webb in 1960, combines single-family homes and condominiums with resort-style amenities in its Sun Cities. The company builds residential golf communities and single-family subdivisions, as well.

Pulte is selling homes in 11 developments in the Las Vegas area.

"The deal is a good strategic fit for Pulte," said David Weaver, analyst for Legg Mason Wood Walker Inc., a brokerage firm in Baltimore. "Pulte is building on its homeowners for life strategy, but they weren't that strong in the retirement category until today."

During the last six months, Pulte Homes, founded by William Pulte in Detroit in 1950, launched a national television campaign to improve its brand image, and ultimately, sales. The company now encourages first-time buyers to stay with the builder for life through a targeted marketing program.

The company also changed its name from Pulte Corp. to Pulte Homes and developed a new logo. Last year, Pulte posted a 22-percent increase in operating profits to $218.4 million on revenues of $4.2 billion.

"Del Webb was a major piece of the puzzle we were looking for," said Robert Burgess, Pulte's chairman and chief executive. "We had a good presence in active adult, but we now we plan to lead the market."

"Pulte has been positioning themselves for a move like this for some time," said Dave Kellett Sr., president of Kellett Construction, a luxury home builder in Bloomfield Hills. "I wouldn't be surprised to see more developments like this down the road."

"We have strong brand names in Del Webb and our Sun City retirement communities, and those names will continue under the new arrangement," said LeRoy Hanneman, Del Webb's president and chief executive.

The companies will retain the Pulte Homes name and remain based in Bloomfield Hills. Del Webb's current business will become the Del Webb Group of Pulte Homes, based in Phoenix.

Burgess will remain as chairman and chief executive of Pulte Homes until his previously announced retirement at the end of this year. He will be succeeded as chief executive by Mark J. O'Brien, currently president and chief operating officer.

In turn, Pulte, 69, will return as chairman next year, a position he previously held in the 1970s. He currently serves as chairman of the company's executive committee.

Hanneman will retire after the deal closes.

Pulte plans to pay between one share to 0.866 of its shares for each Del Webb share. That's if if Pulte shares average from $39 to $45.03 during the 15-day period prior to the transaction.

If Pulte's stock price is above $45.03, Del Webb shareholders would receive 0.866 shares of Pulte Homes common stock. If Pulte Homes' stock price is between $33.00 and $39.00, Del Webb shareholders would receive one share of Pulte Homes common stock.

If Pulte Homes' stock price is between $30.00 and $33.00, Del Webb shareholders would receive $33.00 of Pulte Homes common stock, or between 1.1 and 1 shares of Pulte stock.

If Pultes' stock price is below $30.00, Del Webb shareholders would receive 1.1 shares of Pulte stock.

Based upon Pulte's closing price of $46.78 on Monday, Pulte would be required to issue approximately 16 million shares of its common stock to complete the transaction. Pulte Homes' current shareholders would own approximately 73 percent of the combined company and Del Webb's current shareholders would own about 27 percent.

The Detroit News, Bloomberg News, Arizona Republic and the Las Vegas Sun contributed to this report.