Is Icahn's WCI Bid the Start
Of Home-Builder Buyouts?

Carl Icahn says he is taking the long view in his quest to buy a home builder in Florida, one of the nation's weakest housing markets. But it remains uncertain whether other big-money investors will follow his path and try to scoop up companies in the beleaguered home-building sector.

"If you look at long-term trends and don't think about short-term turmoil, that is where the risk returns can be greatly in your favor," Mr. Icahn said in an interview yesterday, after signaling the intent of his investment affiliates to initiate a tender offer of $22 a share for the common stock of WCI Communities Inc., which specializes in building Florida high-rise luxury-condominium towers. "On a medium- to long-term basis, there are a lot of factors that will help Florida. The war babies moving south and the migration of South Americans moving north."

Mr. Icahn's move comes after he accumulated a sizable stake in WCI in recent months, as the housing sector has been buffeted by sluggish sales and an oversupply of homes in some markets. His proposed offer, a 16% premium to Monday's closing price, would value the Bonita Springs, Fla., company at about $930 million.

The WCI offer suggests that "as home-builder stock prices continue to be depressed, there could be more companies that appear to be undervalued," says Bob Curran, managing director and home-building analyst at Fitch Ratings.

But analysts are skeptical whether these potentially undervalued companies will attract other buyers, such as private-equity firms flush with cash. Speculation has been swirling in recent months that private-equity investors have been taking a look at home builders. Private-equity firms typically seek companies they can buy cheaply, restructure and use the cash flows generated by the business to pay down debt that is used to finance the deal.

Some home builders are now accumulating cash because they have slowed down their land purchases but are still selling homes they built previously. In addition, they have relatively low debt levels, suggesting they may have room to take on additional debt in a buyout deal.

Builders including Toll Brothers Inc., Ryland Group Inc., Beazer Homes USA Inc. and KB Home have been popping up on the leveraged-buyout "screens" of several Wall Street firms, as their valuations look attractive.

However, many analysts question whether a buyout can work in the long run in the home-building sector, which goes through cycles and requires huge capital investments in land to generate profits during the good times. That means that even though companies are cutting back now and are likely to generate more cash in the near term, they will eventually need to spend in the future to develop land and build more homes. If they have a lot of debt to pay down at the same time they need to invest in new land, their flexibility could be limited.

"On the face of it, a buyout may look attractive, but it's hard to tell how much debt companies can carry, because the housing market hasn't stabilized," says Andrew Brausa, a debt analyst with Banc of America Securities. "Predicting a builder's future cash flows is very difficult."

Some analysts believe a more likely scenario is some builders will seek to merge with their rivals as they look for opportunities to expand before a housing recovery. Gopal Ahluwalia, a staff vice president for research at the National Association of Home Builders, says he believes there could be significant mergers among building companies by the year's end.

The M&A bounce appeared limited to WCI yesterday, as problems with subprime mortgages continued to rattle the sector. While shares of WCI were up $2.83, or 15%, to $21.80 in 4 p.m. New York Stock Exchange composite trading, the Dow Jones Wilshire U.S. Home Construction Index fell 4.4%.

Mr. Icahn's bid for WCI could prove to be a "unique situation," says another Banc of America Securities analyst, Dan Oppenheim. Many long-term investors believe the company's undeveloped land, much of which was purchased before the recent run-up in land prices, is undervalued.

Mr. Icahn has also signaled his unhappiness with WCI's current management. "While clearly now is not the right time to sell, in my opinion, Mr. Starkey [WCI Chief Executive Jerry Starkey] and the current board are not qualified to navigate WCI through the difficult industry conditions that lie ahead," Mr. Icahn said. WCI said it will review Mr. Icahn's bid but declined to comment on his criticism.

The housing slump has hurt WCI more than many builders. WCI has a relatively high amount of debt to total capital, about 66%, and the company's cancellations and defaults exceeded the number of new orders in the fourth quarter. Nonetheless, many analysts believe WCI will stay afloat as dozens of condos close this year, generating as much as $1 billion in cash that could be used to pay down the debt.

Mr. Icahn's proposed offer wouldn't necessarily be a slam dunk, partly because it is conditional on WCI's board pulling a recent poison-pill takeover defense.

Email your comments to rjeditor@dowjones.com.