Kaufman & Broad to Split Insurance, House Businesses : Reorganization Is Aimed at Ending Investors’ Confusion
Los Angeles-based Kaufman & Broad, in a move to clear up investor confusion about its operations, announced a reorganization Monday that will split its housing and insurance businesses into independent companies.
“We’re doing this to enhance shareholder value,” Eli Broad, company chairman and co-founder, said in an interview.
“We’ve had the worst of both worlds,” he added, explaining that Wall Street has undervalued the company’s operations in both housing and insurance.
Kaufman & Broad currently runs its housing operations through its majority-owned subsidiary Kaufman & Broad Home, which was created in 1986. Under the proposed overhaul, that unit--the state’s largest home builder--would become independent. The remaining insurance and other financial services operations would be called Broad Inc.
Eli Broad will be the housing company’s chairman and largest shareholder, with an 18% stake, as well as chairman, chief executive and controlling shareholder of the insurance and financial services company. He is now chief executive and controlling shareholder of Kaufman & Broad.
Both Kaufman & Broad stocks, which are traded on the New York Stock Exchange, rose on the news. Kaufman & Broad’s shares closed at $13.50, up $1.875, while Kaufman & Broad Home closed at $12.75, up $1.50.
“It’s a very positive move,” said Barbara K. Allen, housing analyst for Prudential-Bache Securities in New York.
Eli Broad, 55, founded the firm 31 years ago with partner Don Kaufman, who died in a private plane crash in Southern California five years ago. Originally from Michigan, Broad got started in the business using $25,000 that he borrowed from his in-laws. Over the years he has become a well-known business figure in Los Angeles and a patron of the arts. He was the first chairman of the city’s Museum of Contemporary Art.
Though begun as a home building firm, Kaufman & Broad bought its first insurance company in 1971. Since then, those insurance operations have swelled through acquisitions and accounted for more than half the firm’s profits last year.
But lumping these businesses together made Kaufman & Broad difficult for the financial community to understand and analyze. “What do I know about insurance?” Allen asked.
Kaufman & Broad sells insurance and annuities through Sun Life Group of America and Anchor National Life Insurance. Kaufman & Broad Home, which specializes in moderately priced housing, is a major builder in California and France.
Bruce Karatz, 43, will be chief executive of the housing operations, which he has run for several years, while Marc I. Stern, 44, formerly managing director of the Henley Group in San Diego, will become president of Broad Inc.
Stern has extensive experience in acquisitions, planning and merchant banking that will allow Broad Inc. to “seek out new opportunities . . . in related financial-services or in other fields of endeavor,” Eli Broad said in a prepared statement.
In recent years, Kaufman & Broad’s insurance and financial-services business has grown rapidly, going from $1 billion in assets four years ago to nearly $7 billion today. It has also been reorganizing those businesses, divesting traditional life insurance operations and focusing on the sale of investment products such as annuities. Those divestitures, coupled with lower capital gains on investments, “significantly” cut earnings this year, the firm said.
Kaufman & Broad said it aims to complete its proposed split-up, which still needs final stockholder approval, by next spring.
Under the proposed reorganization, the current shareholders of Kaufman & Broad would receive a tax-free distribution of three-quarters of a share in Kaufman & Broad Home for each share they now own in the parent company. In other words, a shareholder would get 15 shares in the housing company if he now owns 20 shares in the parent company. His 20 existing shares would become 20 shares in Broad Inc. The original Kaufman & Broad will no longer exist.
Other terms of the overhaul include:
- Each Kaufman & Broad Home shareholder will receive a cash dividend of $4.50 a share before the distribution of new stock. The parent company currently owns 91% of the housing cocern.
- Kaufman & Broad will acquire $81.8 million in preferred stock and 10-year common stock warrants in the housing company. The preferred stock is expected to be exchanged for debt securities next year.
- Kaufman & Broad Home will have 25 million shares available for trading, compared to the 2.3 million shares now available. The increase will provide “market liquidity and trading volume to attract additonal interest by institutional investors,” Eli Broad said.
KAUFMAN & BROAD INC. AT A GLANCE Kaufman & Broad is a multinational company involved in home building, financial services and insurance. Although founded as a builder, Kaufman & Broad bought its first insurance company in 1971. It sells life insurance and annuities primarily through Sun Life Group of America and Anchor National Life Insurance. These operations accounted for more than half the company’s profits last year.
Year ended Nov. 30
1987 1986 1985 Revenue (billions) $1.52 $1.09 $0.84 Net income (millions) 57.3 44.2 38.9
Assets: $5.39 billion Shareholders’ equity: $354 million Common stock: 32.1 million shares Shareholders of record: 3,191 Sources: Kaufman & Broad, Standard & Poor’s
KAUFMAN & BROAD HOME CORP.
Kaufman & Broad Home Corp., based in Los Angeles, is 91.6% owned by Kaufman & Broad Inc. It is the largest home builder in California and the third largest in France, specializing in the development of moderately priced homes. It also provides mortgage financing through its wholly owned mortgage banking subsidiary.
Year ended Nov. 30
1987 1986 1985 Revenue (millions) $671.8 $491.2 $338.7 Net income (millions) 35.5 27.6 23.1
Assets: $547 million Shareholders’ equity: $189.4 million Common stock: 27 million shares Source: Kaufman & Broad
