Citigroup On Homebuilding M&A Possibilities: DR Horton, Toll Brothers And PulteGroup Targets In Focus

Will Randow of Citi took a deep dive into the homebuilding sector to explore which companies are best positioned for M&A activity.

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 (NYSE: 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. (NYSE: DHI) is best positioned to generate the highest amount of accretive opportunities.

Some of the acquirers mentioned in the analysis include:

• KB Home (NYSE: KBH).
• Meritage Homes Corp (NYSE: MTH).
• PulteGroup, Inc. (NYSE: PHM).
• Toll Brothers Inc (NYSE: TOL).
• TRI Pointe Group Inc (NYSE: TPH).

The universe of targets includes:

• Century Communities, Inc (NYSE: CCS).
• Green Brick Partners Inc (NASDAQ: GRBK).
• M.D.C. Holdings, Inc. (NYSE: MDC).
• Meritage Homes Corp.
• New Home Company Inc (NYSE: NWHM).
• Taylor Morrison Home Corp (NYSE: TMHC).
• UCP Inc (NYSE: UCP).
• William Lyon Homes (NYSE: 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.