Will KB Home Ditch Its French Unit?

Shares in the homebuilder climbed Friday after it said it is evaluating an offer of $783 million for its Kaufman & Broad SA subsidiary

Will KB Home (KBH) say au revoir to its French subsidiary? The Los Angeles homebuilder said on May 11 that it has received an offer of €53.13 per share to purchase the 10.9 million shares it owns in its French unit Kaufman & Broad SA (KBH.PA).

KB Home might be tempted by the $783 million such a sale could bring. The company said it is currently evaluating that offer and is also evaluating other strategic alternatives, including a public or private offering of its shares in the French unit or retaining its shares.

The money could come in handy as the U.S. housing market continues to buckle. Thomas Smith, an analyst with Standard & Poor's Equity Research, says the company could use the money to bolster its balance sheet, or to fund future land acquisitions if prices fall to the point where the company sees a good opportunity. Either way, "cash gives you maximum flexibility," Smith says.

Kaufman & Broad SA, with €1.3 billion in annual revenue, accounted for 18% of homes the company delivered in the fiscal year ended November, 2006. It mainly builds single-family homes and apartments in Ile-de-France and other regions of France, and also has a commercial construction arm. While it has shown signs of flagging recently, the French housing market has held up better than the U.S.

Investors liked the idea of the possible asset sale. KB Home shares gained 3% to $44.53 in NYSE trading May 11. The shares remain well below their 52-week high of $60.67 from a year ago, but are up from the low for the period of $37.89 reached July 21. Kaufman & Broad SA, which is is listed on Euronext Paris, lost 3.6% to trade at €60 on May 11.

The company said back in March that it believes the sharp downturn in the housing market that began in 2006 and that continues to pressure the sales and profit margins of domestic homebuilders will likely continue for at least the remainder of 2007 (see BusinessWeek.com, 3/22/07, "KB Home Sees Tricky Times Ahead"). It also warned that "recent problems in the subprime mortgage market combined with tightening credit requirements could exacerbate the already difficult conditions in the homebuilding industry."

The company is responding to broadly slower new home demand through a number of initiatives, according to a Standard & Poor's report. It is reducing the time it takes to close on a home -- which should also help minimize order cancellations -- and writing down the value of its land holdings. In fiscal 2006, the company took non-cash charges of $431 million as it sought to bring inventory into line with lower demand.

KB Home has had problems off the lot as well. An investigation found that KB Home used the wrong dates for granting stock options between 1998 and 2005. The company had to announce in November that its CEO Bruce Karatz would be leaving and has yet to file restated financial results for the quarter ended Aug. 31 and year ended Nov. 30.

S&P's Smith maintained his hold recommendation on KB Home shares on May 11. "We see no premium, based on recent prices of French listed shares," he wrote in a research note. "Divestment of what we view as a relatively sound international division to bolster U.S. operations" amid an industry downturn could be beneficial, Smith said. "But we see enough uncertainty about the terms of a sale, if any occurs, to keep our hold opinion on these volatile shares." (S&P, like BusinessWeek.com, is a unit of The McGraw-Hill Cos. [MHP].)