updated 4/8/2009 7:51:00 PM ET 2009-04-08T23:51:00

Pulte Homes Inc. is buying Centex Corp. for $1.3 billion in stock in a deal that will create the nation’s largest homebuilder that caters to everyone from first-time homebuyers to grandparents looking to move into retirement communities.

The acquisition also will give Pulte large tracts of land in Texas and the Carolinas, two of the most resilient real estate markets, and a presence in 29 states and Washington, D.C.

The new company, which will include the Del Webb and Fox & Jacobs brand homes, will keep the Pulte name and headquarters in Bloomfield Hills, Mich. There will be an unspecified number of job cuts.

“It allows us to not only survive, but thrive in any economic climate,” said Richard Dugas Jr., Pulte’s president and chief executive, who retain those titles over the combined enterprise.

The deal underscores the tough choices homebuilders across the industry have to make in the face of brutal market conditions. New home sales are down 76 percent from their peak in mid-2005, and nearly every builder is hoarding cash or looking for a lifeline.

Pulte built 45,630 homes in 2005 and Centex 37,022. Last year, both companies built less than half those levels, and have slashed construction and prices to stem the red ink.

Pulte lost almost $3.73 billion over the past two years, more than wiping out all of its profits for the prior three years. Centex lost $2.66 billion last year, erasing its earnings for the prior four years.

The worst housing recession since the Great Depression has toppled many homebuilders, and Centex Chairman and Chief Executive Timothy Eller was determined his Texas-based company wasn’t going to be among them.

So, two months ago he picked up the phone and called Dugas.

“Richard agreed that this would be a very strong combination, very complimentary. As you can tell, it’s moved quite swiftly since that first initial call,” said Eller, who will become Pulte’s vice chairman and will work as a consultant for two years following the acquisition’s completion.

The combined company will have twice the revenue of its next largest rival, D.R. Horton Inc. Pulte and Centex pulled in a total of $11.61 billion in the last twelve months, compared to D.R. Horton’s $5.82 billion.

“Clearly, industry consolidation was inevitable at some point ... we are by far the two most similar companies in homebuilding,” Dugas said.

Integrating Centex’s operations will save Pulte $350 million a year. The new company will have $1.8 billion in debt and cash reserves totaling $3.4 billion. The company will pay off $1 billion in debt by the end of the year.

The new industry behemoth will be better poised to take advantage of the market’s recovery, which executives said is just beginning.

On Wednesday, new data showed loan applications to purchase a home rose 11 percent last week. And new home sales climbed almost 5 percent from January to February, providing some hope that the sales may have reached a bottom.

But the recovery could be choppy depending on the length and depth of the nation’s recession.

“It is pretty bad out there,” said Robert Curran, an analyst with Fitch Ratings. “Does this prevent things from getting worse at the new Pulte? No.”

Wall Street analysts also are concerned about the risk of taking on so much land in other areas where home prices are still plummeting, including Sacramento and Riverside, Calif., and Cape Coral, Fla.

“I never would have thought Centex and Pulte would have gotten together, but of all the sort of potential combinations out there, it’s probably the one that makes the most sense,” said Robert Stevenson, an analyst with Fox-Pitt Kelton.

While beaten-down shares of other homebuilders like Beazer, Lennar and Hovnanian rallied on speculation they could be easy takeover targets, Stevenson was doubtful.

“If you look at the rest of the players, it’s tough to find an overlap in terms of operation and valuation where you can easily get a deal done,” he said.

Pulte is offering Centex shareholders 0.975 shares of its common stock for each share of Centex that they own. The transaction is valued at $10.50 per Centex share based on Pulte’s Tuesday closing stock price of $10.77. That represents a 38 percent premium to Centex’s closing price of $7.62 Tuesday.

Pulte stockholders will own about 68 percent of the combined business and Centex shareholders will own the remaining 32 percent.

Shares of Centex soared $1.44, or nearly 19 percent, to $9.06 on Wednesday. While Pulte stock sank $1.13, or about 10.5 percent, to $9.64.

Centex had approximately 124.4 million shares outstanding for the quarter ended Dec. 31, 2008.

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