A $117 million deal that would have made a top-10 local powerhouse homebuilder in the sizzling Nashville market a member of one of the nation's leading 15 multiregional public homebuilding enterprises came undone late last week.

M.D.C. Holdings on Friday, May 13, issued an SEC Form 8-K announcing it would terminate publicly-announced plans to acquire the Jones Company of Tennessee – a deal both buyer and seller expected would close before the end of June – saying simply:

Today, the Company has determined not to proceed with the transaction as provided for under the terms of the Purchase Agreement."

We'd written two weeks ago about the Nashville combination of Jones Company and M.D.C. as a strong strategic fit that would bolster Jones' three-plus decade-deep local relationships, customer reputation, and land capital in what's become one of the pandemic era's hyperkinetic secondary market rock-stars with M.D.C.'s financial capital and strategic heft.

We'd also written about the $117 million public-to-private combination in a backdrop of intensifying motivations on the part of both strategic acquirers and sellers in a 2022 operating environment full of unpredictable currents, capricious hazards, upended construction cycles, and swiftly escalating win-or-lose stakes as inflation and unleashed interest rate impacts bite off ever bigger chunks of what was 60 to 90 days ago a relatively predictable future of homebuyer demand.

So, we'll look here at both the micro – i.e. localized – effects of the transaction coming apart, and we'll also query whether this scotched deal reflects any suddenly-relevant macro considerations or ramifications for the broader M&A environment in a year that could expect to see a bumper crop of deals.

All principals in the transaction have gone quiet. Written and phone requests for further information from the buyers – M.D.C. Holdings – and the seller-side party, led by the Jones Company ceo Ken Stricker, were not answered at the time of this article's publication.

Why the break-up? Why now?

At a micro level, here's what we can surmise based on a review of Securities & Exchange documents associated with the original agreement with the Jones Company, filed April 22, 2022.

• M.D.C. has exercised its right to exit the planned purchase. Not clear from the subsequent 8-K filing is whether M.D.C. cited "cause" for its decision not to move forward or not, as that has not been disclosed in public filings. Likely, M.D.C. is exiting the agreement based on provisions noted in Section 3D of the purchase agreement:

Due Diligence Period; Termination Right. If Buyer determines that the Due Diligence Contingency is not satisfied or decides to not purchase the Purchased Assets for any reason or no reason whatsoever, in Buyer’s sole and absolute discretion, then Buyer shall have the right to terminate this Agreement by written notice to Seller delivered on or before the date which is five (5) days prior to the Closing Date (the “Due Diligence Period”), in which event Buyer shall pay to Seller the Buyer Break-Up Fee if due pursuant to Section 11(c) below, this Agreement shall be of no further force and effect, and all parties hereto shall thereupon be relieved and absolved of any further liabilities or obligations whatsoever to each other hereunder, except with respect to those liabilities or obligations hereunder which are expressly stated to survive the termination of this Agreement. If Buyer does not send a termination notice on or before expiration of the Due Diligence Period, Buyer shall be deemed to have waived the Due Diligence Contingency and its right to terminate this Agreement pursuant to this Section 3(d). Payment of the Buyer Break-Up Fee, if due pursuant to Section 11(c) below, shall be Seller’s sole and exclusive right and remedy for Buyer’s termination of this Agreement, all other rights and remedies under this Agreement, at law, or in equity being hereby irrevocably and forever waived and released.

• In this event, M.D.C. would agree to forfeit a $600,000 "break-up fee" the agreement required it to place into a letter of credit with the HomeAmerican Mortgage Corporation as an offset to The Jones Company's incurred "liquidated damages" as a result of the deal termination.
• As a result, The Jones Company will go back to exploring combinations with other potential suitors, as whatever specific motivators for a sale of its operations, its land assets, and its value-generating human capital capability at this time would still be in play – and maybe even heightened in the intervening time-period since it first shook hands with M.D.C.
• Further, M.D.C., which has harbored a long-standing interest in the Nashville market, and recently stepped up its organic growth in the arena, will go back to its own drawing board on whether an acquisition or its more-practiced but slower organic trajectory in the market makes the most sense strategically.

As for The Jones Company's immediate prospects, word is the operator has lost no luster as a "catch," providing both strategic and cultural contribution from buyer and seller align and each party remains resolute in the face of trickier thorns and thickets of government obstacles and impediments to the respective sides getting the full value they expect from the combination.

It may be that as keen as some would-be acquirers might be in a housing market dynamic that's gone into shifting-ground-mode, the endgame question of "will this deal close?" may hang not on strategic motivations, but on M&A practice.

Some would-be acquirers in the hunt for deeper local scale in a hot pandemic-era economy, or incremental closings volume capability, or greater exposure to less interest-rate and inflation-sensitive value buyers may have the wherewithal to land acquisitions, but may lack a certain kind of "stomach" for the specific delta between a "gross consideration" of value and a "net consideration," after government fees, taxes, and new burdens factor into the final deal value.

In this particular case, The Jones Company principals and key stakeholders bet on a strategic partner that checked all the right boxes when it came to operational, geographical, and broader strategic alignment.

What M.D.C. is not – in relative terms – is highly practiced in the disciplines, asset reassessment, operational, infrastructural, IT, financial, and, importantly, cultural rigors specific to acquiring and integrating companies into its fold. Historically, M.D.C.'s strategic management has proudly voiced the enterprise's reluctance to engage in M&A as a growth strategy, particularly in housing cycle stretches regarded as frothy.

Which is not to say that M.D.C. is not capable nor less than highly motivated to keep exploring how it will play out its plans for growth in Nashville. Only that in this time round, its leaders discovered late in due diligence more to be concerned about as a fit than they felt comfortable moving ahead on.

What the deal break-up means at a macro level

Questions as to whether the decision on M.D.C.'s part not to move ahead with a medium-large, geographical market-targeted private homebuilding company acquisition bodes a new, more hesitant near-future stretch for mergers and acquisitions deal flow in home building might be natural.

Inflation and a Federal Reserve bent on reining it in with a sustained series of aggressive moves to tighten and increase the cost of capital introduce an unaccustomed array of impacts on owned and accessible resources, whether it's capital, land, or any other class of inputs to value creation.

At the same time, according to executives we speak to who are highly active in the matchmaking spectrum of homebuilding operations buying and selling, the market's new more severe dynamics and imbalances serve mostly as a catalyst for M&A urgency, rather than a dampener.

Recently fielded data from BTIG/Homesphere in its Homebuilder Survey expose a fast-changing, and cooling demand market on top of an already challenged and supply-constrained surface level environment for builders. Among the toplines:

Sales dropped in April, with 32% of respondents reporting YOY increases in sales v. 46% in March and 72% in April 2021.

Traffic trends slowed considerably, with 33% reporting an increase in YOY traffic compared to 44% last month and 76% in April 2021.

Sales and traffic relative to expectations fell sharply. 20% of respondents saw sales better than expected v. 34% last month. Just 28% saw better traffic than expected vs. 38% in March 2022 and 56% last year.

76% of builders raised some, most or all base prices in April, down from 86% last month and the peak of 100% in May 2021.

How far off the peak will the market settle and create a floor? Anybody's guess right now.

However, as far as the impact of this fluid period of limbo on M&A, experts believe it will fuel rifle-shot market-specific deals that deliver acquirers the volume, revenue, and margin deltas they've guided on for 2022, as well as platforms for future growth once the crazy economic crosswinds settle into the next new housing cycle.

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