Builders Standard Pacific, Ryland Jump After Merger Deal

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Shares of Standard Pacific Corp. and Ryland Group Inc. jumped after the Southern California homebuilders said they would combine, a deal giving them greater scale and opportunities to capitalize on the housing recovery.

Standard Pacific stockholders will own about 59 percent of the combined company after a share swap, the builders said Sunday in a statement. Standard Pacific will implement a one-for-five reverse stock split, then give Ryland investors 1.0191 shares for every one they hold. Fractional shares will be paid in cash.

The deal would create one of the largest public builders in the U.S. and give the companies wider geographic and product diversification as the U.S. housing market continues its recovery. The combined entity, which will build entry-level to luxury homes, will be in 41 metropolitan areas in 17 states. Within two years, the builders expect to develop a corporate presence on the East Coast, according to the statement.

“We think now is the right time,” Standard Pacific Chief Executive Officer Scott Stowell said Monday on a conference call with analysts. “We certainly don’t think it’s too early now, having just been through this great recession. The risk now, to an opportunity like this, would be that we do it too late.”

Shares of Standard Pacific, based in Irvine, rose 5.6 percent, the most since February, to $8.83. Westlake Village-based Ryland climbed 5.2 percent to $45.02, its biggest gain since January.

‘Light’ Valuation

On Friday, the last day of trading before the deal was announced, Standard Pacific closed at $8.36, giving it a market value of $2.3 billion, according to data compiled by Bloomberg. Ryland closed at $42.79, valuing it at $2 billion. In the 12 months ended March 31, the pro forma combined company delivered a total of more than 12,600 homes with combined revenue of $5.1 billion, according to the statement.

The deal values Ryland’s shares at about $42.60 apiece, about 0.4 percent less than last week’s closing price, Jay McCanless, a Sterne Agee Group Inc. analyst, said Monday in a note to clients calling the valuation “light.”

The companies “are two well-run builders that should be stronger competitors as a merged entity,” McCanless wrote. “However, the transaction valuations are in line to slightly below our coverage group’s current valuation.”

Together, the companies completed sales of 12,633 houses in 2014, trailing only D.R. Horton Inc., Lennar Corp. and PulteGroup Inc., according to a report by Bloomberg Intelligence analyst Drew Reading. The combined entity also ranked fourth in the U.S. by revenue, he said.

‘Gain Scale’

“What it helps them do is gain scale, both of them,” Reading said in a telephone interview. “The most important thing for homebuilders is to establish scale in the markets you operate in.”

Stowell will become executive chairman of the combined company, while Ryland’s chief, Larry Nicholson, will be CEO.

Standard Pacific has about 46 percent of its communities in California, 17 percent in Texas and 17 percent in Florida, according to an investor presentation. Ryland’s top market is Texas, making up 21 percent of its communities, followed by the Midwest at 18 percent and the Mid-Atlantic at 17 percent. Ryland also has a significant presence in the Carolinas, Florida, California, Colorado, Nevada and Arizona.

“Historically, Ryland has been a builder that has never tried to have too much exposure in one given market,” Alex Barron, an analyst with Housing Research Center LLC in El Paso, Texas, said by phone. “They were in many markets at a smaller scale. Standard Pacific is in a few markets at a bigger scale.”

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