Hovnanian Shares up Sharply On Takeover Speculation

Shares of home builder Hovnanian Enterprises (HOV) closed nearly 11% higher and option activity surged on takeover speculation Wednesday, with Toll Brothers (TOL) bandied about as a possible suitor.

New Jersey-based Hovnanian declined to comment. Toll Brothers, based in Pennsylvania, didn't immediately respond to a call and email seeking comment.

Rumors regarding the two companies have swirled for some time but analysts following the companies downplayed the likelihood Wednesday afternoon. One analyst noted the gain could be short covering, as short interest in Hovnanian has increased for more than two months, though it remains well below highs set last July. About 20% of Hovnanian's shares were held short as of July 15, compared with 10% for Toll.

The options market appeared to be responding to the chatter. Trading in Hovnanian options jumped to five times the normal level, with investors picking up 8,000 calls that allow them to buy the company's stock and 600 puts that allow them to sell it, according to Trade Alert. A bulk of the action took place in Hovnanian's August $5 calls. Those contracts, priced at 15 cents, make money if the stock climbs above $5.15 before August 21. Trading in Toll Brothers, meanwhile, remained normal. Investors picked up 900 calls and 700 puts.

Such a takeover could make sense, given that Toll Brothers caters to a wealthier clientele and it lacks an affordable entry-level product. However, Toll's niche has turned it into a brand name that has weathered the worst housing downturn in decades better than most builders. Hovnanian, which is more highly levered and capital-constrained than its peers and is hoarding cash to meet future obligations, "seems to be running out of time," Gimme Credit analyst Vicki Bryan has noted.

Meanwhile, builder combinations have been rare during the downturn, given that land can be snapped up for a bargain from numerous troubled or bankrupt builders. While Pulte Homes (PHM) and Centex (CTX) are set to merge to become the nation's largest builder later this year, no other big-builder combinations have been announced.

Shares of Hovnanian, which has a market cap of $264 million, closed Wednesday up 41 cents, or 10.8%, to $4.22 but are down 1.5% to $4.16 in late trading. Shares have traded about midway between the year high of $9.67 and low of 52 cents.

Shares of Toll, with a much larger market cap of $3.35 billion, rose 1.2% to $20.79 and is unchanged in late trading. Toll stock has traded between $28 and $13.55 over the past year.

-By Alexandra Scaggs and Dawn Wotapka, Dow Jones Newswires; 212-416-2193; [e-mail]

(Tenille Tracy and Geoffrey Rogow contributed to this report.)