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Lennar and CalAtlantic Agree on a $9.3 Billion Merger Deal

Lennar Corp. LEN has agreed to take over CalAtlantic Group Inc. CAA in a $9.3 billion deal (including debt), which will create one of the the country’s top three home builders in 24 of the top 30 U.S. markets.

Post this announcement CalAtlantic shares increased 21.3% to $49.07 in yesterday’s trading. Lennar’s shares, however, were down 4% at $55.68.

The Deal

CalAtlantic investors would be allowed to exchange each share they own for 0.885 shares of Lennar Class A common stock. That represents a 27% premium, based on Oct 27’s closing price of Lennar shares.

CalAtlantic shareholders will also have the option of electing to exchange all or a portion of their shares for cash in the amount of $48.26 per share, subject to a maximum cash amount of approximately $1.2 billion.

CalAtlantic investors would own approximately 26% of the combined entity upon the deal's expected closing in the first quarter of 2018.

The cash-and-stock transaction comprises $3.6 in net debt assumption and will create a combined company with a roughly $18 billion market capitalization.

Buyout Synergies

Miami, FL-based Lennar has a large footprint in California, Arizona, Florida, Tennessee, Virginia, Washington, Nevada and elsewhere. CalAtlantic has presence in Illinois, Indiana, Delaware, Florida, South Carolina, North Carolina and other states.

By combining, Lennar and CalAtlantic Group will control nearly 240,000 homesites nationwide, thereby enhancing their scales in the markets. The combined company will have a footprint touching approximately 50% of the U.S. population and the combined entity is expected to generate meaningful cost savings.

The deal is expected to generate roughly $250 million in annual cost savings, with about $75 million in savings expected in fiscal 2018. The savings include lower overhead costs and elimination of duplicative corporate expenses.

Meanwhile, shares of Lennar have gained 28.9% year to date, underperforming the 50.5% growth of its industry. Stuart Miller, CEO of Lennar, expects the merger to drive Lennar’s shares, given the cost savings and an improved financial image.

Earlier, in September 2016, the company announced that it would buy luxury home builder WCI Communities for $643 million. The companies wrapped up the deal in February 2017.

Zacks Rank & Key Picks

Lennar carries a Zacks Rank #3 (Hold).

Other better-ranked stocks in the industry are NVR, Inc. NVR and KB Home KBH. While NVR sports a Zacks Rank #1 (Strong Buy), KB Home carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NVR’s earnings are expected to grow 41.3% in 2017, while that of KB Home by 56.8%.

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Lennar Corporation (LEN): Free Stock Analysis Report
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NVR, Inc. (NVR): Free Stock Analysis Report
CalAtlantic Group, Inc. (CAA): Free Stock Analysis Report
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