KB Home Sheds Stake in French Firm Favored by Karatz

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KB Home has done away with another of former chief executive Bruce Karatz’s pet projects.


KB Home last week accepted an offer of about $812 million from Paris-based private equity firm PAI Partners for its 49 percent stake in French developer Kaufman & Broad SA. At one time, about 30 years ago, Karatz managed the company’s French operation.


“France was Bruce’s baby,” said analyst Gregory Gieber of A.G. Edwards & Sons Inc., who covers KB. “He cut his teeth in the French division and his success in France was spectacular. CEOs like their babies, and plus the thing was doing well. He understood it. He was maybe better able to handle the issues, worries and risks better than somebody who has only done U.S. housing.”


Karatz retired from the company last November in the midst of a scandal over backdated stock options. In December, KB pulled out of the Los Angeles Convention Center hotel project at downtown’s L.A. Live development another of Karatz’s pet projects.


Under the new leadership of chief executive Jeff Mezger, KB has refocused on its “core business” and is “looking at long term opportunities for the company,” KB spokeswoman Caroline Shaw said. The sale reflects the company’s new direction.


“KB Home and its board of directors believe the proposed transaction would be in the best interest of its shareholders,” Mezger said in a statement. “The sale would further KB Home’s focus on its core homebuilding operations in the U.S. where long-term prospects are excellent.”


The Los Angeles-based homebuilder said that the $74.24 per share bid for its stake in France’s largest homebuilder came in at 3.5 percent more than the investment firm originally offered. However, that price is still more than 9 percent off of the May 16 closing price of Kaufman & Broad SA stock on the Euronext Paris exchange.


The sale of KB’s 11 million shares of the French developer does not require shareholder approval, Shaw said, and the KB board has already approved the deal. However, approval from the European Union antitrust regulators is still required.


KB Home opened the French division in 1967.


With the souring of the domestic housing market, the timing of the sale appears to be right on the money for KB, said Gieber, who gives KB a “neutral” rating.


“The U.S. housing market is in one of its sharpest contractions of the post-World War II era period,” said Gieber. “You have a CEO who wants to spend all of his time focusing on the U.S. market. Therefore, even if the French operation is well-oiled with skilled executives, it is nice to not have to worry about it.”


Gieber said that while he does not anticipate a “serious sag” in the French housing market, any U.S. homebuilder who has experienced the domestic downtown would not “want to worry about that happening in another country.”


“You always have to worry about something that is going great going sour,” he said.

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