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Fitch, Moody’s bullish on massive Lennar-CalAtlantic merger

Both cite combined company’s size as significant benefit

Both Fitch Ratings and Moody’s Investor Service have a positive view of the impact of the pending merger between Lennar and CalAtlantic Group.

On Monday, the homebuilders announced a deal that will see Lennar acquire CalAtlantic in a deal valued at approximately $9.3 billion. The deal will create the nation’s largest homebuilder.

In brief notes sent Tuesday to clients, Fitch and Moody’s noted the strength and size of the combined company as a significant benefit of the deal. The deal combines the nation’s 2nd and 5th largest homebuilders, based on the number of homes built.

According to Fitch’s report, the combination of Lennar and CAA creates the largest homebuilder in the U.S. (based on revenues), with homebuilding revenues of about $17.2 billion and deliveries of 43,672 homes in the last 12 months.

The nation’s largest homebuilder currently is DR Horton, which has homebuilding revenues of $13.3 billion and deliveries of 44,833 homes in the last 12 months.

In its note, Fitch affirmed its ratings of Lennar and said that its rating outlook is “positive,” citing the combined company’s ability to compete in major markets as an upside.

“More important, the combined company will have a top-3 position in 24 of the 30 largest MSAs in the country and a top-10 position in 36 of the 50 largest MSAs,” Fitch notes in its report. “The combined company will have operations in more than 49 markets across 21 states. The two companies have a compatible product mix serving the first-time, move-up, active adult and luxury homebuyers.”

Moody’s was also bullish on the combined company’s strength in large markets, as well as the cost savings associated with the deal.

In its report, Moody’s placed CalAtlantic’s stock under review for an upgrade based on the deal.

“The transaction is expected to create annual cost savings and synergies of approximately $250 million with about $75 million achieved in fiscal 2018,” Moody’s notes. “The synergies and cost savings primarily come from direct cost, reduced overhead, and the elimination of duplicate public company expenses. We believe that the synergies could exceed $250 million as both companies have demonstrated their ability to create value via acquisitions.”

In its report, Fitch also cited the positive financial benefits of the deal for Lennar.

“The Positive Outlook incorporates Fitch’s expectation that the combined company's credit metrics will improve following the transaction as Lennar delevers the balance sheet, including net debt/capitalization (excluding about $250 million of cash classified by Fitch as not readily available for working capital purposes) approaching 40% approximately 12 months after the close of the transaction,” Fitch noted.

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