Weyerhaeuser and the Questionable Home Builder Sale

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Weyerhaeuser Co. (WY) soon will be a paper and forestry company that is merely a paper and forestry company, if reports that have resurfaced turn out to be fact. Reports hit yet again on Monday that the company is seeking to sell is home builder division. What is interesting is what the unit could fetch. Reuters reported that TRI Pointe Homes Inc. (TPH) was in advanced discussions to buy the home builder unit for somewhere around $2.7 billion. We have been waiting for a deal of sorts to come up here, but this deal may be too small to make the company's board punch out.

Where we take issue is that some reports in the past had Weyerhaeuser's home builder unit valued at more than $3 billion. That was what the Wall Street Journal floated in August, but we would point out that Weyerhaeuser's builder unit is not even in the top 10 builders in America. Its 2012 sales were about 2,300 units.

The value may not be in the inventory of homes but as a land bank. Weyerhaeuser's home builder unit has thousands of lots available, when you consider its giant land holdings. This was put at 27,000 lots, with more than 17,000 of those being in California.

We would caution that the company has been exploring alternatives for the unit since June. The value that Reuters floated is one we think actually may not force Weyerhaeuser into unlocking the value, because the value could be deemed as too low, based on the last bit of softening home sales driving values down.

TRI Pointe shares have rallied on the hope that it is getting the unit, which would be a big win for the company since it is relatively new on the public markets. Weyerhaeuser shares ended effectively flat, so what does that tell you as far as who the market thinks is getting the better side of the deal?

Other names thrown out as possible bidders were Taylor Morrison Home Corp. (TMHC), also a new home builder and home owning company to the public markets, and Brookfield Residential Properties Inc. (BRP). What we would caution is that the sizes of potential buyers could come up as an issue on financing and the like:

  • The Brookfield unit has a market cap of $2.67 billion, although the controlling company Brookfield Asset Management Inc. (BAM) is worth nearly 10 times that value.
  • Taylor Morrison's market cap is listed as only $727 million.
  • TRI Pointe is worth only about $500 million in market cap, and that is after the pop.

We are not sure that one of the established home builders will not try to come in at the last minute. Lennar Corp. (LEN) is worth some $6.8 billion, and PulteGroup Inc. (PHM) is just behind that with a market cap of $6.4 billion. Then you have DR Horton Inc. (DHI), worth about $6.1 billion, and Toll Brothers Inc. (TOL), worth some $5.5 billion. It would be far easier for any of these home builders to do a deal, but we are not so certain that any of them want to leverage up now that home prices have caught so far back up to where they were before housing imploded. Here are some existing issues with each, as their shares are much closer to 52-week lows than 52-week highs:

  • Lennar's stock is down 20% from its 52-week high.
  • Pulte is down about 32% from its 52-week high.
  • DR Horton is down just over 30% from its 52-week high.
  • Toll Brothers is down about 17% from its 52-week high.

On last look, Weyerhaeuser managed about 6.4 million acres of private commercial forestland and has long-term licenses on 13.9 million acres of forestland. We once opined that the company's land holdings were so vast that Weyerhaeuser should apply to become the 51st state in America, and that is still the case now, in a manner of speaking.

Weyerhaeuser was up 0.5% at $30.26 shortly after the open on Tuesday, but its 52-week trading range is $24.75 to $33.24. Note that its market cap is over $17.6 billion. Unlocking $3 billion or $4 billion in value is one thing. Unlocking less is another matter entirely.

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