Weaving a New Webb

The strategy, unveiled by new CEO LeRoy Hanneman to members of the high-yield debt community earlier this month, also involves "an examination" of adding smaller active-adult communities from 1,000 to 3,000 acres to its mix of very large active-adult and multigenerational developments. Traditional Del Webb Sun City or Anthem communities are generally larger than 5,000 acres.

To analysts who track the company for investors, the news was welcome -- particularly the companyÆs restated focus on debt reduction. Webb presently carries a 70% debt-to-capital ratio -- considerably higher than most other top-tier public home builders. The plan calls for the company to reduce its debt to 66% of invested capital for the year ending Dec. 31 and by another six points by fiscal 2003.

While the news of the strategic plan was welcome, many analysts say the company has needed to do it for some time. Having built one of the most recognizable brands in any industry around a model of developing very large active-adult communities over eight- to 15-year horizons, the company needed to find ways to balance its revenue stream, they say.

"I think they are acknowledging that this is a different world," says Samuel A. Lieber, an analyst with Alpine Asset Management in New York. "Del Webb is an anachronism in a way. They are still taking big pieces of land and developing them. Sure they are using (land) options more than they used to, but they are sort of the old school."

These questions of whether and how to finance the enormous land positions that Webb has purchased in recent years go to the heart of the conflict between some shareholders and management.

Anne L. Mariucci, Del WebbÆs senior vice president and general manager of family and country club communities, argues that the question of whether to borrow more money or to sell more stock in order to finance the company's most recent "mega" land buys was not really a question at all. Limited by the "historically" low valuations in the stock market, management chose to offer debt.

"I think some people have misunderstood this question of debt ù like it kind of snuck up on us by surprise. That was not the case at all," explains Mariucci. "We undertook, in the last three years, four mega-projects in which we invested three-quarters of a billion dollars. And when we embarked on doing those projects we told the marketplace that we would have a short-term increase in our debt level, above and beyond what we would normally like. Who would have wanted to sell equity in a home building company over the last couple of years to raise capital for their growth?"

Mariucci also took pains to dispel the perception that the new strategic plan was a response to criticism from opposing shareholders. She says the strategic planning process at the company had been under way since Hanneman took over in January. The basic plan, she says, was ready to be unveiled at the same time that J.F. Shea & Co., the parent company of Shea Homes, and Pacific Partners announced their plan to oppose the managementÆs slate of board candidates. The managementÆs slate eventually prevailed in voting that took place Nov. 2 at the annual meeting.

"While externally it appears that one begat another," notes Mariucci, "we were actually well down the road with this strategic plan before any of the external events occurred."

Cost reduction is another area of focus within Del WebbÆs new plan. It also goes to the issue of debt reduction, calling for cuts in selling and general administrative (SG&A) and construction costs. This, too, was well-received by some analysts who have criticized the companyÆs higher-than-average compensation for top executives, its lucrative seven-figure departure bonus to outgoing CEO and current board chairman Philip J. Dion, and its generally high expenses.

"If you donÆt keep those centralized costs low, then when the downturn comes, and it is inevitable, you are going to be in trouble," says Barbara Allen, an analyst with Arnhold and Breichroeder Inc. in New York. "In a way, Webb has been like a European company in that they spend a lot of money on the upper management in terms of large expense accounts and at the same time they pay them a lot, whereas the Europeans donÆt do that. Webb seems to do both."

Timothy L. Jones, an analyst with Ryan Beck & Co.Æs Southeast Research in Boca Raton, Fla., agrees that debt reduction is key to the companyÆs plan. He particularly likes the companyÆs intention to look at smaller projects. "This company uses cash like mad," Jones says. "No other builder would even think of doing a 10,000-unit development. So I think that is a very meaningful positive for the company."

Del WebbÆs Mariucci says the plan of how and when to begin partnering with other builders has not been formalized. For outside observers, the key is whether the company follows through on partnering within some of its existing large developments such as Anthem in Arizona, not just the new developments that come on line. Mariucci says Webb will invite builders into developments of all types, but which developments, when and who are details still in the planning stages.

AplineÆs Lieber sums it up this way: "I am sure that other builders would love to be in their communities and utilize and benefit from the Del Webb name."

From an investor standpoint, the stock market reacted positively to the news. In the days after the announcement, Del Webb Stock, WBB, rose to a 52-week high at just more than $30 per share.

Pacific Partners, which once owed more than 5% of the companyÆs stock and proposed its own rival slate of board members, revealed it had recently sold 192,000 shares. But it still owns 810,000.

Also See:

Del Webb's New Strategic Initiatives