News & Notes Archive - July 2005
As MH industry slowly recovers, the landscape changes. July marks more acquisitions by the major players. What this means for home buyers.
Last year, when Omaha-based Berkshire Hathaway Inc., the sprawling conglomerate controlled by billionaire legendary investor Warren Buffet, purchased Clayton Homes, Inc. of Maryville, Tennessee, the MH industry's largest company, for $1.7 billion, observers predicted, A., the industry was set to emerge from a brutal slump that began in 1999 and, B, Buffet and company would likely make other acquisitions at fire sale prices to establish a dominant position within the MH sector.
They were right on both counts. Months after coming under new ownership, Clayton Homes, backed by Berkshire, purchased former rival Oakwood Homes as the latter struggled through a Chapter 11 bankruptcy. Along with the Oakwood brand came three well-regarded MH brands that Oakwood itself had acquired during the go-go 90s: Golden West Homes, Marlette Homes and Schult Homes.
Here in the summer of 2005, the Berkshire-fueled subsidiary continues to roll. Late last month Clayton Homes announced an agreement to buy Karsten Homes, a respected builder of mid- to high-end homes in the Western US. The acquisition amounts to coming full-circle for Karsten founder Harry Karsten. He is the founder of Golden West Homes which was purchased by Oakwood in 1994. He started Karsten a year later in Sacramento, California, and currently operates three other plants, in Oregon, New Mexico and Texas. Karsten and his management team will continue to run the company.
Ten days later, on July 7, 2005 Fleetwood Enterprises, Inc., one of the country’s largest producers of both RVs and MH, announced it had reached a deal to sell the assets of its network of 123 company-owned retail sales centers in 21 states for $74 million to, you guessed it, Clayton Homes. In addition, Fleetwood will also sell to Vanderbilt Mortgage, a Clayton subsidiary, the retail loan portfolio of its HomeOne Credit Corporation, valued at around $70 million.
For Fleetwood, the sales mark the end of a disastrous chapter that began during the MH boom of the 90s when the company, in an attempt at vertical integration, bought the nation’s largest chain of independent dealerships (way overpaying for it), then purchased or started from scratch scores of other sales centers, at one point owning 244 dealerships by 2000, just as the MH industry went into a tail spin. The spending spree saddled Fleetwood with over $200 million in debt and a vast money-losing operation. The Company was fortunate to find a willing buyer while cash-flush Clayton Homes acquired its new holding for a song.
With these recent moves, Clayton Homes has truly become the 800 lb. gorilla of the MH marketplace. Even before the Fleetwood purchases, Clayton had 392 company-owned stores, plus more than 1,400 independent dealers, 32 manufacturing plants and 83 MH communities.
As important, Clayton’s two finance units—Vanderbilt Mortgage and 21st. Century Corp.—together finance about $17 billion in loans, many purchased in the past year from other lenders (CitiCorp and J.P. Morgan, to name two) who were exiting the MH sector because the avalanche of MH repossessions were stripping the profits from their loan portfolios.
What does all this mean to the home buyer? For one, greater access to financing for homes purchased from Clayton and its subsidiary brands: Oakwood, Schult, Marlette, Golden West and Karsten. Included in this availability are so-called ‘home-only’ personal property, or chattel, loans that are regarded as riskier because they are not backed by the land under a home, only the value of the home itself, which historically tends to depreciate rapidly in value. For another, Clayton’s geographical presence is now truly national, meaning its affordable housing brands are widely available.
But don’t expect to find easy credit terms when you shop. Clayton’s two finance units survived the MH bust because, unlike many competing lenders during the 1990s run-up, they stuck with conservative borrowing standards, ensuring far fewer loan defaults when the crunch hit.
Beyond this, while there is always a danger of higher prices and/or a decline in quality and service when one company becomes too dominant in any market.
Berkshire Hathaway stays on a roll, snapping up RV maker Forest River and its MH subsidiary Hart Housing
Hardly had the ink dried on the agreement for Clayton Homes’ purchase of Fleetwood’s retail sales centers (above) than on July 22, 2005 Clayton’s owner, Berkshire Hathaway, struck again, this time purchasing RV, bus and boat manufacturer Forest River of Elkhart, Indiana, and its 20 subsidiary companies, including MH builder Hart Housing. Forest River employs 5,500 people and had $1.3 billion in sales in 2004.
For the Warren Buffet-controlled holding company, the acquisition is the first foray into the RV marketplace, but Hart Housing (itself purchased by Forest River in June 2004) becomes the seventh MH brand to be bought by Berkshire or one of its subsidiaries.
Any doubts that MH industry observers had that Buffet’s Berkshire Hathaway is out to be the dominant player in the MH marketplace have been put to rest. And the buying spree may not be over. Cash-rich Berkshire Hathaway is only one of seven U.S. companies to have the best debt-rating possible—AAA—which means it could literally buy as big a stake in the industry as it wants.
In any event, the infusion into the MH marketplace of so much cash can only contribute to the rebound of manufactured housing in general, and this bodes well for the home buying consumer.
Champion Enterprises, Inc. buys New Era Building Systems, a leader in both MH and modular homes
On July 25, 2005, Champion Enterprises, the third-largest player in the MH industry (and itself a rumored takeover target) announced it will acquire the well-respected modular and manufactured home builder New Era Building Systems of Strattanville, PA, for $41 million. New Era has long built high-end HUD-code homes featuring innovative designs and a site-built look, but in recent years has shifted more of its production to modulars. The acquisition, which also includes two New Era affiliates, Castle Housing of Pennsylvania and Carolina Building Systems, is expected to add about $100 million a year in sales to the new parent company, making Champion the largest U.S. modular builder, with a 12% market share.
So, in all, a very eventful July 2005 for the MH industry’s movers and shakers. Historically, a period of intense activity involving mergers and acquisitions is typical of many industries just beginning to emerge from a deep down cycle, as has happened with MH. In sum, a good sign that the MH industry is on its way back to good health. In some regions, California and Florida, to name just two, that health is downright robust.