KB to sell lucrative French subsidiary
KB Home said Thursday that it was in talks to sell its thriving French unit to a private equity firm for more than $800 million, a deal that would infuse the beleaguered home builder with cash and allow it to shed another vestige of its former leader’s legacy.
Westwood-based KB Home, which is one of the largest builders in the United States, is unique among its peers because it also constructs houses in France. Its Gallic odyssey began in the late 1960s, when Kaufman & Broad (as it was then known) sought to expand by heading to Western Europe.
The French division became the pride of KB Home’s former chief executive, Bruce Karatz -- who once referred to the overseas unit as “my baby” in a letter to The Times. He was appointed head of the unit in 1975 at age 30 and turned it into one of the largest and most profitable builders in France.
Karatz gained near-celebrity status there when he installed a full-size model home on the roof of a popular Paris department store, which attracted hundreds of thousands of looky-loos. The 1977 stunt helped solidify the company as a building-industry force in France.
In the years that followed, KB Home brought a series of American features to French home buyers, including master bedroom suites and open front yards without walls or fences.
Although the French unit is profitable -- and outperforming its U.S. parent -- the company decided to shore up its balance sheet amid a housing slump that has taken a toll on profit and sent shares down 16% in the last 12 months.
“The decision to sell our position in France was a strategic one,” said KB Home CEO Jeffrey Mezger. “We felt that [for] the price we could get, the situation in the French marketplace and the challenges we have in the U.S., we’d rather focus our attention on our core business because the long-term prospects are so good.”
KB has a 49% ownership stake and majority voting rights in the French subsidiary, Kaufman & Broad SA. Paris-based PAI Partners has agreed to pay 55 euros a share, or about $812 million in cash, for the company, which provided 21% of KB Home’s revenue.
Mezger said the deal had been approved by KB’s board and was awaiting European regulatory approval.
KB Home shares rose 65 cents to $44.62 in U.S. trading. The stocks of most U.S. home builders rose Thursday after Federal Reserve Chairman Ben S. Bernanke said the U.S. economy should ably weather the nation’s current housing slump.
One Wall Street analyst called the planned sale “a modest positive” for KB Home, which is struggling through the housing downturn along with all other U.S.-based home builders. The all-cash deal would give KB Home “dry powder” for future land purchases and other investments, said Daniel Oppenheim of Banc of America Securities.
Mezger said KB Home would evaluate what to do with the money after the transaction closes, which probably would happen in the third quarter.
“My hunch is we will continue to focus on ... our balance sheet, our stock buyback program and have some cash to be opportunistic in the [housing] markets when we know they have settled,” Mezger said. “And they haven’t settled yet.”
While U.S. home sales are slumping, the French housing market is strong. KB’s French unit posted an 11% gain in profit in the first quarter, compared with its parent’s 84% drop.
Karatz’s successful stewardship of the French operations put him on the path to become chairman and CEO in 1986. Karatz’s executive reign continued until last fall, when he retired after an internal investigation found that he had picked stock option grant dates that inflated the value for himself and other executives.
Since then, KB Home has moved to undo some of Karatz’s programs, including creating a nonexecutive chairman post and implementing a less lucrative executive compensation program.
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