There is a big deal in the homebuilding industry today -- literally and figuratively. Lennar Corp. (LEN 56.28, -1.73, -3.0%) and CalAtlantic Group (CAA 49.26, +8.81, +21.8%) are tying up in a $9.3 billion stock-and-cash deal that will create the nation's largest homebuilder.
Lennar is driving the transaction, which includes the assumption of $3.6 billion in net debt from CalAtlantic whose shareholders will own approximately 26% of the combined company.
The terms of the deal, which is expected to close in the first quarter of calendar 2018, provide CAA shareholders with a buyout option. They can accept 0.885 shares of LEN for each share of stock they own, which has an implied value of $51.34 per share, representing a 27% premium over Friday's closing price, or they can elect to exchange all or a portion of their shares for $48.26 per share in cash, subject to a maximum cash amount of approximately $1.2 billion.
According to Lennar, it expects to realize $75 million in synergies in FY18 and $250 million in synergies in FY19 through direct cost savings, reduced overhead costs, and the elimination of duplicate public company expenses.
When the deal is complete, the company will control approximately 24,000 homesites, have approximately 1,300 active communities in 49 states, and a top 3 ranking in 24 of the nation's top 30 markets.
Lennar builds affordable, move-up and retirement homes while CalAtlantic constructs homes that range from entry-level to luxury.
Given the equity component involved, it is not surprising to see LEN shares trade lower in the wake of the acquisition announcement. Thus far, there has been a mixed response among other homebuilding stocks to today's news.
The iShares US Home Construction ETF (ITB 39.47, +0.11), whose largest holding is D.R. Horton (DHI 43.76, -0.56, -1.3%), is up just 0.3% as the weakness in LEN, the second-largest holding, is acting as a restraint.