In Deal with Elliott, PulteGroup Hikes Buybacks, Adds Directors

The activist fund's involvement led to three new board members, a moderation in land investments and a $1 billion increase in its share repurchase program
By Ronald Orol ,

Shares of PulteGroup  (PHM) - Get Report , one of the largest U.S. homebuilders, were up significantly in on news Thursday that it struck a settlement with activist investor Elliott Management's Paul Singer to install three dissident directors to a 13-person board and expand its share repurchase program by $1 billion.

PulteGroup's shares were trading at $21.20, up nearly 4% from their Wednesday closing price on the announcement of the deal.

The settlement also comes after PulteGroup's founder and former CEO, William Pulte, an 8.7% holder, launched a public campaign for change at the Atlanta, Georgia-based company in April. Specifically, William Pulte has been seeking change in the company's leadership—particularly the removal of CEO Richard Dugas, who he argued in letters has contributed to "significant value destruction" by laying off "irreplaceable home-building talent" and moving the company's headquarters from Detroit to Atlanta at a cost of "tens of millions of dollars."

Elliott had been accumulating a stake in PulteGroup over several months, even before Pulte launched his own public effort and letter writing campaign in April, according to people familiar with the activist fund, and the insurgent fund eventually accumulated a 4.7% stake.

The influence of an experienced activist took Pulte's campaign into overdrive. The activist fund, which is not afraid to launch proxy contests to elect dissident directors to drive its agenda, engaged in a series of discussions with the homebuilder's management about major changes.

According to a person familiar with Elliott, the activist fund calculates that the board augmentation and the new buyback program, together with Pulte's current extensive land and community investments, can result in the stock price doubling to between $35 to $40 a share. He added that the higher valuation can be attributed to PulteGroup currently trading at a material discount to its peers, a buyback program that is expected to bring in $3.50 to $4 a share in value and the company's plan to cut back on selling, general and administrative expenses. 

As part of the deal PulteGroup agreed to increase the size of its board by one to 13 seats and add three new directors with real estate, homebuilding and financial services experience—Scott Powers, a financial services executive; Joshua Gotbaum, a financial and policy executive; and John Peshkin, a real estate investor and homebuilder.

PuteGroup had previously launched a CEO search committee—though some shareholders were unsure about whether PulteGroup would bring in an effective new top executive. Seeking to expand and drive that effort, two of the new dissident directors, Peshkin and Gotbaum, are being appointed to the search committee. "We welcome the input of these two experienced finance and homebuilding executives into our CEO search process," Patrick O'Leary, PulteGroup director and search committee leader, said in a statement. 

In addition, as part of the deal, the homebuilder decided to moderate the growth of their land investments at the same time that it moved to hike its authorized share repurchase program by $1 billion to $1.5 billion, setting out a plan to buyback $250 million in each of the third and fourth quarter fo 2016 and $1 billion in 2017. The buyback, PulteGroup suggested, would be financed by free cash flow and new leverage. "It is not simply an amount that they will use as market conditions warrant," said one person familiar with the settlement. "They've signed themselves up for a specific schedule of repurchases."

In addition, the people familiar with the investors said they believe that PulteGroup has a significant hidden asset in terms of its land and inventory, which they contend has significantly greater value than those of its peers. "They already own a lot of land and there is not a need to continue to grow their inventory at the same pace," he said. "Cutting back on investment in lots will not impact growth because they have so much land and it will reduce operating risks if the cycle changes. Land is the most volatile asset in homebuilding." 

On a call with analysts, a Pulte executive said that the investment in land moderation won't be significant. "We're not going to grow our investment in land at the 30% plus rate that we have in recent years," he said. 

In a statement issued by PulteGroup, Dave Miller, a portfolio manager at Elliott Management, said he is excited about the skills and perspectives that the new directors will bring to the board. 

On the call with analysts, Dugan responded to an analyst who wondered whether the chief executive's replacement would result in a continuation of the company's shifted strategy, which includes the largely expanded buyback program. "The board is very aligned as the leadership team is around a value creation strategy," Dugan said. "Our board members who have met with investors have made it clear that they are focused on value creation."

It's unclear whether Pulte, the founder, has concluded his own campaign at PulteGroup. However, the settlement with Elliott likely is a significant step in that direction.  

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