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D.R. Horton (DHI) Offers $520 Million to Buy Out Forestar

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D.R. Horton, Inc. (DHI - Free Report) intends to buy 75% shares of Forestar Group Inc. (FOR - Free Report) , a residential and mixed-use real estate development company, for about $520 million in cash. Successful completion of the deal will enhance D.R. Horton’s footprint on Texas.

Forestar's shares ended at $16 on Jun 5, up 12.7%, while D.R. Horton's shares ended 1.5% lower at $33.29.

D.R. Horton's Proposal

Homebuilder giant D.R. Horton has offered $16.25 per Forestar share, which is a 14% premium over the purchase price of $14.25 from an existing merger agreement signed between Forestar and Connecticut-based Starwood Capital Group in April.

The proposed transaction also enables Forestar to remain a public company, thus ensuring continued access to capital in order to support the increasing scale of the business. The offer will also help Forestar grow organically into the leading residential land development company in the country, selling developed residential lots to D.R. Horton and other homebuilders.

D.R. Horton’s Gain From this Buyout

Land development and homebuilding are correlated but fundamentally different operations. With an impressive second-quarter sales backlog of $4.4 billion, along with a well-stocked supply of land, lots and homes, D.R. Horton is a best-in-class homebuilder that will benefit from a strong strategic relationship with a separate land development company like Forestar. The deal will also help the company to increase focus on maximizing return on assets and inventory turns.

Forestar owns interests in 49 residential and mixed-use projects comprising 4,400 acres of real estate spanning across 10 states and 14 markets. The deal would also help D.R. Horton expand operations in Texas, the state which is witnessing positive housing momentum. Additionally, Chief Operating Officer Mike Murray added on a call with analysts that the deal would generate $1 billion more in annual revenue for D.R. Horton over five years.

This buyout will give a meaningful percentage boost to D.R. Horton’s current holdings of 227,000 lots (owned and under control). The company remains on track to close approximately 45,000 homes in fiscal 2017.

The proposed bid also highlights the ongoing issues being faced by homebuilders related to rising land and labor costs. Limited capital for land and land development has left entitled lands in short supply while growing demand drove land prices higher. The labor market has also tightened with limited availability of labor arresting the rapid growth in housing production.

Another homebuilding company, Lennar Corp (LEN - Free Report) acquired Florida-based homebuilder WCI Communities Inc., completed its acquisition of WCI Communities, Inc., a premier lifestyle community developer and luxury homebuilder of single and multi-family homes in February in order to enhance its land holdings.

Zacks Rank & Key Stock

D.R. Horton carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Investors can also consider William Lyon Homes (WLH - Free Report) , which carries a Zacks Rank #1. The company is expected to witness 38.4% growth in earnings this year.

Share Price Movement

D.R. Horton’s shares have gained 21.8% year to date, underperforming the Zacks categorized Building-Residential/Commercial industry’s growth of 24.7%. Going forward, rising land and labor costs and competitive pricing pressure could weigh on the company's performance.

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