Consolidation Beat Goes on as Meritage Buys Perma-Bilt

Flush with high share prices, big public builders are back on the acquisition trail. Targets are usually midsize to large private builders offering a platform for the public company to enter a new market. Meritage Corp.'s recent acquisition of Perma-Bilt Homes in Las Vegas is a classic example of the consolidation trend.

Meritage was founded by Arizona builder Steve Hilton in Scottsdale and John Landon, who operates out of Dallas. The latest Giants rankings have the firm at No. 25 on revenue of $742.5 million from 3,270 closings in 2001. The company operates under assorted names in markets including Phoenix and Tucson in Arizona, Dallas/Fort Worth, Houston and Austin in Texas, and San Francisco's East Bay and Sacramento in California. It has long coveted entry into Las Vegas.

Perma-Bilt closed 413 detached homes in 2001 for $83.5 million. Danny Schwartz, 79, founded Perma-Bilt in 1993 but never owned it. "It was owned by Zenith National Insurance, out of Los Angeles," Hilton says. "Danny had a unique arrangement where he was entitled to a large portion of profits. He acted as principal, although he wasn't a stockholder.

"We've been looking at Las Vegas for five years and talking to all the private builders, including Perma-Bilt. When conditions in the insurance industry changed and Zenith became interested in selling, they knew we were interested. They wanted assurance that the management team would be retained. That fit our plan perfectly. We don't buy real estate; we buy people. Danny will continue as CEO and division president. We have a three-year contract with Danny, but he can stay as long as he wants."

Purchase price is estimated at $46.6 million, composed of cash at closing of $29.9 million and repayment of existing debt of $16.7 million plus an earn-out.

Hilton says Meritage wants to find similar entry points into Southern California, Denver, Atlanta and Florida. "We're looking for people who share our focus on high margins and high return on capital, people who want to take their chips off the table but stay in the game."