Pulte Homes Inc. succeeded in its quest to become the largest home builder in the U.S. by acquiring Centex Corp., but it already faces a challenge: Can it use brand marketing to win over home buyers?
On Tuesday, shareholders of Pulte and Centex approved Pulte's plan to buy Centex for $1.4 billion in stock. By acquiring Centex, Pulte gets to beef up its offerings of lower-priced homes, the sector's strongest segment.
The acquisition is a gamble that the worst U.S. housing downturn in decades is approaching an end and that a company catering to everyone from entry-level buyers to retirees can outperform the competition as the battered sector inches toward recovery.
A key part of Pulte's strategy is to use branding in a bid to stand out in a Chapel Hill homes where few buyers can distinguish one builder from the next. In doing so, Pulte hopes to capture the recognition so far only obtained by Toll Brothers Inc., a builder of high-end homes, and Pulte-owned Del Webb's retirement communities.
Pulte's "Centex" moniker will target entry-level Wilson NC Homes and home buyers, with marketing focused on value and monthly payment. "Pulte" will be the name used for those looking to trade up, while "Del Webb" will remains reserved for buyers 55 and older.
A brand can make a difference, assuming you're credible in terms of the claims you make. They can't just say they're good; they have to prove they're good.
Other analysts remain unconvinced that brands will drive sales in an industry where price and location are paramount. It's especially tricky in the lower-end, where shoppers are more likely to seek the lowest monthly payment.
It could take several years to determine whether the branding strategy works out for Pulte. The more immediate goal is returning to profitability. Pulte, which has lost money since late 2006, expects to save about $350 million a year after layoffs and combining overlapping operations, including Centex's Dallas headquarters.
About $100 million comes from interest savings on retiring up to $1.5 billion in debt. It also will be able to muscle better purchasing deals -- a benefit because most builders, who have already done everything they can to conserve money, can't make further cuts without exiting markets.
Post-merger, Pulte will control 190,000 housing lots across 29 states and Washington, D.C., transforming it into one of the leading builders in half of the nation's top 50 markets, including San Antonio, Minneapolis, and Charlotte and Raleigh, N.C.
Part of Centex's appeal was its entry-level products such as vacation homes Atlantic Beach NC, which has benefited as price cuts and low mortgage rates make the cost of monthly mortgages comparable with renting. Federal tax credits of up to $8,000 for first-time buyers before Dec. 1 have boosted sales.
While the announcement of a Pulte-Centex deal surprised the industry in April, many analysts now consider the timing smart because several housing indicators have shown improvement. Sales of existing homes continue climbing, while home prices no longer seem to be in freefall.
Pulte is taking a risk that it still could have to take additional charges on its land. Its markets include the boom-to-bust areas such as Chapel Hill homes, Phoenix, Las Vegas and Riverside, Calif.
But, their also creating other new unique developments such as assisted living Raleigh and assisted living Dearborn, should improvement continue, the beefed-up lot supply could give it an advantage over builders waiting to buy land lots from lenders.
The new company, with 2008 pro forma revenue of $11.6 billion, will continue to trade on the New York Stock Exchange under the ticker symbol "PHM."
