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D.R. Horton Edges Out Starwood to Buy 75% Stake in Forestar

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The bidding war between Starwood Capital Group and D.R. Horton, Inc. (DHI - Free Report) to buy Forestar Group Inc. (FOR - Free Report) is over, with D.R. Horton emerging as the clear winner. The homebuilder has finally signed a definitive merger agreement to buy 75% shares of Forestar Group, a residential and mixed-use real estate development company.

D.R. Horton’s latest cash offer of $17.75 per Forestar share seemed to be a “superior proposal” with respect to its earlier bid of $16.25 per share and from the $16 per share offer price from the agreement signed between Forestar and Connecticut-based Starwood Capital Group. The latest merger deal is valued at about $560 million.

The merger is expected to close in the fourth quarter of 2017 upon approval of Forestar shareholders and other closing conditions.

Buyout Benefits

Currently, rising land costs and a tight labor market are threatening homebuilders’ margins, thus hampering initiatives taken by them to tap the ongoing strength of the U.S. housing market. 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.

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 will also help D.R. Horton expand operations in Texas, which is witnessing positive housing momentum. Earlier, Chief Operating Officer, Mike Murray, had said 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 deal would add to D.R. Horton's fiscal 2018 earnings.

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.

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

Forestar’s Gain

Land developers are facing difficult times in securing fund from banks as well as lenders who are not willing to invest in land and home lot development. Thus, this deal will give Forestar access to the capital it requires to operate and enhance throughout the nation.

The 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. Again, it will help Forestar grow organically to become a leading residential land development company in the country, selling developed residential lots to D.R. Horton and other homebuilders.

In the long term, D.R. Horton has plans of gradually diminishing its ownership position in Forestar and boosting the public float of the firm's stock. Forestar will continue to trade under NYSE under the symbol “FOR”.

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.

A better-ranked stock in the same space is KB Home (KBH - Free Report) , which carries a Zacks Rank #1. The company is expected to witness 46% growth in earnings this year.

Share Price Movement

D.R. Horton’s shares have gained 23.6% year to date, slightly underperforming the Zacks categorized Building-Residential/Commercial industry’s growth of 27.1%. Going forward, rising land and labor costs and competitive pricing pressure could weigh on the company's performance.

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Forestar Group Inc (FOR) - free report >>