CalAtlantic Group Inc (CAA) Shares Soar on Acquisition News


CalAtlantic Group Inc (NYSE:CAA) and Lennar Corporation (NYSE:LEN) announced that they have entered into a definitive merger agreement pursuant to which Lennar will acquire CalAtlantic in a stock-and-cash deal valued at about $9.3 billion or $51.34 per share. The purchase price represents a 28% premium to CalAtlantic’s closing share price on October 27, 2017, and expected to close in the first calendar quarter of 2018.

Stronger Together as the Largest Home Builder in the US

The business combination will create the nation’s largest homebuilder with the last twelve months of revenues in excess of $17 billion and equity market capitalization, based on current market prices, of approximately $18 billion.  The combined company will control approximately 240,000 homesites and will have approximately 1,300 active communities in 49 markets across 21 states, where approximately 50% of the U.S. population currently lives.

It is currently anticipated that the transaction will generate annual cost savings and synergies of approximately $250 million, with approximately $75 million achieved in fiscal year 2018.  These synergies are expected to be achieved through direct cost savings, reduced overhead costs and the elimination of duplicate public company expenses.  Additional savings are also expected through production efficiencies, technology initiatives, and the roll out of Lennar’s digital marketing and dynamic pricing programs.

Stuart Miller, Chief Executive Officer of Lennar, said, “This combination is first and foremost to enhance shareholder value. The transaction is accretive before deal costs in fiscal year 2018 and significantly accretive in fiscal year 2019.  The combined company will have a strong balance sheet and generate significant cash flow available to pay down debt and repurchase shares, which will improve returns on capital and equity.”

Mr. Miller continued, “This combination increases our scale in the markets that we already know and in the products we already offer to entry level, move up and active adult customers. As a result, the combined company will have a top 3 ranking in 24 of the top 30 markets in the country.”

“Accordingly, our overall company size and local critical mass will yield significant benefits through efficiencies in purchasing, access to land, labor and overhead allocation to a greater number of deliveries. The combined land portfolio will position the company for strong profitability for years to come, as we continue to benefit from a solid homebuilding market, supported by job and wage growth, consumer confidence, low levels of inventory, and a production deficit.”

Larry Nicholson, President and Chief Executive Officer of CalAtlantic, said, “Our combination with Lennar underscores the quality and attractiveness of the CalAtlantic brand and people, and the business our talented team has worked hard to build.  Lennar is a well-respected name in the homebuilding industry and their team shares a deep commitment to innovation, quality, integrity and a focus on a superior customer experience.”

Rick Beckwitt, President of Lennar, said, “We have great respect for what Scott StowellLarry Nicholson and the CalAtlantic team have accomplished, building upon the rich legacies of Standard Pacific and Ryland.  Our discussions over the last several months have only reinforced our conviction that by joining forces, we will achieve new heights in our industry and create significant value for all of our shareholders.  We share common cultures and deep traditions of delivering quality and value, doing the right thing and exceeding the expectations of our customers.  We look forward to executing our strategy as a larger and even stronger company and welcoming a very talented group of CalAtlantic associates to the Lennar family.”

As of this writing, shares of Calatlantic are up nearly 23% to $49.67. CAA has a 1-year high of $50.48 and a 1-year low of $30.20. The stock’s 50-day moving average is $37.17 and its 200-day moving average is $36.22.

On the ratings front, Calatlantic stock has been the subject of a number of recent research reports. In a report issued on October 25, UBS analyst Daniel Oppenheim initiated coverage with a Hold rating on CAA and a price target of $42, which reflects a potential downside of -14% from last closing price. On October 24, KeyBanc’s Kenneth Zener reiterated a Hold rating on the stock.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Daniel Oppenheim and Kenneth Zener have a yearly average return of 9.9% and 7.5% respectively. Oppenheim has a success rate of 69% and is ranked #875 out of 4701 analysts, while Zener has a success rate of 60% and is ranked #1201.

Sentiment on the street is mostly neutral on CAA stock. Out of 4 analysts who cover the stock, 3 suggest a Hold rating and one recommends to Buy the stock. The 12-month average price target assigned to the stock is $41.00, which represents a potential downside of 16% from where the stock is currently trading.