Lennar buys CalAtlantic to become largest U.S. homebuilder

By Arunima Banerjee

(Reuters) - Lennar Corp will buy smaller rival CalAtlantic Group Inc for $5.7 billion, creating the largest homebuilder in the United States as it strives to deal with higher land acquisition costs and a tighter labor market.

The deal announced by the companies on Monday is the first major merger in the U.S. housing sector in more than two years and will make the unified firm one of the top three homebuilders in 24 of the United States' 30 biggest markets.

Valued at $5.66 billion in stock and shares, plus $3.6 billion in net debt, analysts said the buyout would give Lennar a better foothold in booming housing markets in California from which CalAtlantic drew a third of its revenue last year.

But the move also reflects the pressure on builders due to a shortage of skilled labor that is constraining the supply of homes and pushing costs up even as U.S. house prices rise for a seventh straight year.

CalAtlantic's shares jumped 23 percent after the announcement of the deal, which valued its shares at $51.24 per share a premium of 27 percent to Friday's close, but Lennar's fell almost 3 percent.

"(It's) go big or go home," Credit Suisse analyst Susan Maklari wrote in a note on the deal.

"Builders are increasingly seeking greater volume and cost controls in order to offset higher land and input costs and drive better profitability and returns. Size helps to better manage land and labor constraints."

The deal turns up the heat on sector mergers after a pair of smaller moves by Lennar and its biggest rival, D.R. Horton. It valued the combined firm at $18 billion, compared to Horton's market cap of around $15.6 billion.

The combined company sold 40,792 homes last fiscal year, according to the companies' separate SEC filings versus Horton's 40,309.

Horton shares were broadly flat in morning trade in New York.

Lennar said it would save $75 million in costs next year and $250 million in 2019 in efficiencies due to the merger of the two operations.

"LEN has an opportunity to apply a faster turning production homebuilding approach to CAA's larger lot positions," BTIG analyst Carl Reichardt wrote in a note.

Citi was financial adviser for Lennar while JP Morgan Securities LLC advised CalAtlantic.

(Reporting by Arunima Banerjee in Bengaluru; Editing by Martina D'Couto, Bernard Orr)