Why Forestar Shares Are Making a Run

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Forestar Group Inc. (NYSE: FOR) saw its shares make a solid gain to kick off the week after D.R. Horton Inc. (NYSE: DHI) announced that it submitted a proposal to acquire a huge portion of its outstanding shares. Specifically, D.R. Horton is looking to pick up 75% of Forestar’s shares for $16.25 per share in cash.

The $16.25 price level represents a 14% premium over the purchase price to be paid to Forestar stockholders, according to the existing merger agreement between Forestar and affiliates of Starwood Capital Group.

Under the proposed transaction, Forestar would remain a public company. At the same time, D.R. Horton management commented that continuing Forestar stockholders will have the opportunity to participate in significant value creation through a strategic relationship with D.R. Horton that would help Forestar grow organically into the leading residential land development company in the United States, selling developed residential lots to D.R. Horton and other homebuilders.

Also under the D.R. Horton deal, Forestar would be led by new executive chairman, Donald Tomnitz, who served as CEO of D.R. Horton for over 15 years, and a strong management team that is expected to include Forestar’s experienced professionals.

Essentially, this transaction would be effected through a merger of a newly formed, wholly owned subsidiary of D.R. Horton with Forestar. Following the merger, D.R. Horton would own 75% of the outstanding Forestar successor shares, and existing stockholders would own 25% of the outstanding Forestar successor shares. Forestar would remain a public company, and its common stock will trade on the New York Stock Exchange.

Donald R. Horton, chairman of the board, commented:

We believe that D.R. Horton is uniquely positioned to make Forestar the country’s leading residential land development company. Together, we can grow Forestar into a much more significant and valuable company for all of its stockholders. The Forestar proposal is a continuation of D.R. Horton’s stated strategy of expanding relationships with land developers across the country and growing the optioned portion of its land and lot position to enhance operational efficiency and returns. We urge the Forestar Board to act quickly on this proposal which is in the best interests of their stockholders.

D.R. Horton has the cash and other immediately available capital to fund the approximately $520 million investment.

Shares of Forestar were last seen trading up 13% at $16.08, with a consensus analyst price target of $14.25 and a 52-week trading range of $10.60 to $16.15.

D.R. Horton was trading down 1% at $33.44 on Monday. The 52-week range is $26.69 to $34.56, and the consensus price target is $35.92.