Taylor Morrison to acquire smaller rival home builder William Lyon Homes for $2.4 billion

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Arizona-based Taylor Morrison, the nation’s seventh-largest home builder by revenue, said it will buy William Lyon Homes, a California-based builder with a large footprint in the Pacific Northwest, as well as in Colorado and Texas.

Taylor Morrison will acquire all of the outstanding shares of William Lyon Homes common stock for per share consideration of $2.50 in cash and 0.80 shares of Taylor Morrison common stock. The deal values William Lyon Homes at $2.4 billion, including the assumption of debt. This yields a purchase price multiple of 1.0 times book, according to a Taylor Morrison release.

The transaction will consist of approximately 90% Taylor Morrison stock and 10% cash. Based on current trading, Taylor Morrison stockholders will own approximately 77% of the combined company while William Lyon Homes stockholders will own approximately 23%. It is expected to close in the second quarter of 2020.

Shares of William Lyon Homes jumped nearly 12% in premarket Wednesday following the news, while Taylor Morrison’s stock fell 2.9%.

This is Taylor Morrison’s sixth builder acquisition in seven years and will move it up in the rankings to fifth-largest t U.S. builder by revenue.

“The combined business provides the unique opportunity to gain increased local scale and expertise within six of our major markets, while expanding Taylor Morrison into Washington, Oregon, and Nevada,” said Sheryl Palmer, CEO of Taylor Morrison, who said she had been eyeing the Pacific Northwest for years but wanted to wait out a recent “reset” in the market.

“So letting that pass by makes the timing quite exciting,” added Palmer.

Taylor Morrison will also become the third-largest builder in Denver, up from the 14th largest currently.

William Lyon, founded in 1954 and headquartered in Newport Beach, California, had its best year ever in 2018, selling just over 4,000 homes and bringing in revenue of $2.1 billion. Sales, however, lagged at the end of the year and into the first quarter of this year, due to higher mortgage interest rates.

“The decision to partner with Taylor Morrison was based on shared strategic alignment, like-minded core values, and a long history of integrity,” said Matthew Zaist, president and CEO of William Lyon in a release. “We are confident in the success Taylor Morrison demonstrates through its reputation of leadership, quality construction, and unparalleled customer experience, and know our teams, our customers, and our stockholders will be in good hands.”

William Lyon will give Taylor Morrison not only larger geographic scale, but a bigger footprint in the entry-level market, which is extremely strong right now.

“Our bread and butter has been entry, first-time, move-up, and active adult,” explained Palmer. “William Lyon’s business has been about 54% entry-level buyer. Combine those two and it puts us in a very attractive, mid-to-high 30% range in entry-level. Move-up becomes more than three-quarters of our overall business.”

Palmer said she anticipates $80 million in annualized synergies from the transaction. That includes reducing overhead in markets where the companies overlap; some employees will be redeployed, but some will not.

On a pro forma basis, the combined company is expected to generate more than $6.7 billion in revenue, with approximately 14,200 closings and more than 83,000 lots owned and controlled.

CNBC’s Yun Li contributed to this report.

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