According to Randow, discussions of homebuilding M&A have become more common, and if a transaction were to occur shortly, itwould likely be a public company acquiring another public company rather than a smaller private peer.
One of the more recent transactions in the group consisted of Lennar Corporation LEN acquiring WCI Communities for a 37 percent premium.
Randow continued that there are three main benefits when a large acquirer can gain through the purchase of a smaller or younger public company: 1) closing the trading multiple gap as smaller cap builder stocks are thinly traded, 2) generating synergies on 2017 consensus earnings per share and 3) gaining incremental market dominance through market overlap.
"Aside from the normal benefits of M&A, we believe larger public builders may be more inclined to acquire the young (i.e. smaller public) given the slower paced recovery environment that exhibits lower pricing power," Randow added.
Potential Buyers And Their Targets
As previously noted, larger homebuilders will benefit from acquiring smaller homebuilders. The analyst's research found that among the plethora of hypothetical scenarios, D.R. Horton, Inc. DHI is best positioned to generate the highest amount of accretive opportunities.
Some of the acquirers mentioned in the analysis include:
- KB Home KBH.
- Meritage Homes Corp MTH.
- PulteGroup, Inc. PHM.
- Toll Brothers Inc TOL.
- TRI Pointe Group Inc TPH.
The universe of targets includes:
- Century Communities, Inc CCS.
- Green Brick Partners Inc GRBK.
- M.D.C. Holdings, Inc. MDC.
- Meritage Homes Corp.
- New Home Company Inc NWHM.
- Taylor Morrison Home Corp TMHC.
- UCP Inc UCP.
- William Lyon Homes WLH.
Finally, the analyst also concluded that the most accretive scenario among every possible M&A scenario consists of Tri Pointe Group acquiring William Lyon Homes.
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