Toll to Buy California Builder Shapell for $1.6 Billion

Toll Brothers Inc. agreed to buy Shapell Industries Inc.’s homebuilding business for about $1.6 billion, gaining 5,200 lots in the Los Angeles and San Francisco Bay areas as buyer demand for housing rises.

Toll, the largest U.S. luxury-home builder, will pay for Beverly Hills, California-based Shapell with debt and a share offering, the companies said yesterday in a statement. The deal will more than double the number of California lots controlled by Toll to about 9,200, with most in coastal markets where vacant land is hard to come by, Chief Executive Officer Douglas Yearley Jr. said.

“It’s a game-changer for this company,” he said in a telephone interview. “It’s the most exciting acquisition we’ve had in our 46-year history.”

Developers are stocking up on land as U.S. home values climb at their fastest pace in seven years. Earlier this week, Barry Sternlicht’s Irvine, California-based Tri Pointe Homes Inc. agreed to buy the homebuilding division of Weyerhaeuser Co. for $2.7 billion.

In the Shapell deal, 10 percent to 15 percent of the purchase price will be covered by issuing new Toll shares, and Toll plans to sell about $500 million of land from the Shapell portfolio. The Horsham, Pennsylvania-based builder also stands to make money immediately by selling homes in Shapell’s backlog.

‘Significant Return’

“We’re going to get a good amount of the $1.6 billion back relatively quickly,” Yearley said. “The company believes it will receive a significant return of its investment within 18 months of closing.”

Toll Brothers rose 0.5 percent to $32.68 today. The shares are up 1.1 percent this year, compared with a 3.9 percent loss for the 11-member S&P Supercomposite Homebuilding index.

California homes sold for a median of $355,000 in September, up 24 percent from a year earlier and the 19th consecutive month of year-over-year price gains, according to DataQuick, a San Diego-based real estate data provider.

Shapell’s Porter Ranch development, with about 1,800 home sites, is the largest master-planned community in the city of Los Angeles, and its Gale Ranch in San Ramon, east of San Francisco, has 1,500 lots. Shapell sold 350 homes this year through August for an average of $800,000. Toll’s average price in California was about $1 million, Yearley said, compared with $651,000 for all of its homes delivered in its fiscal third quarter.

Sales Rise

Toll said in a separate statement yesterday that the average price of homes delivered in the fourth quarter was about $703,000. Revenue in the three months ended Oct. 31 jumped 65 percent to $1.04 billion, while signed contracts increased 23 percent in dollar terms to $839 million.

The Shapell deal is 10 times the size of Toll’s 2011 acquisition of Seattle-based builder CamWest Development LLC for $150 million. Last year, the company paid $110 million for half of Shea Baker Ranch in Orange County, California, and bought 117 Shapell lots in Yorba Linda, California, for $47 million. That deal helped pave the way for the purchase of the entire company, Shapell CEO Bill West said.

“Toll was just a great match for us culturally,” West said in a telephone interview. “It made the board feel very comfortable that they were a great company to sell to.”

Competing Offers

Other bidders for Shapell included Brookfield Residential Properties Inc., Standard Pacific Corp. and closely held SunCal, according to three people with knowledge of the sales process who asked not to be identified because of confidentiality agreements. Andrew Willis, a Brookfield spokesman; Danielle Tocco, a Standard Pacific spokeswoman; and David Soyka, a SunCal spokesman, declined to comment.

Bidding for Shapell was expected to range from $1 billion to $1.5 billion, the biggest housing target on the market after Weyerhaeuser, Will Randow and Anthony Pettinari, analysts at Citigroup Inc., said in a Sept. 5 note.

Shapell was advised by Lazard Ltd., and Toll was represented by Citigroup.

Shapell was founded by Nathan Shapell, brother David Shapell and brother-in-law Max Webb, according to the company’s website. Nathan Shapell, born Nathan Schapelski in Poland in 1922, immigrated to the U.S. after surviving Nazi concentration camps, according to a 2007 Los Angeles Times obituary. David Shapell, 95, and Webb, 96, come to the office daily, West said.

“They felt there were others who could probably do more for the company and more for the employees,” he said.

Toll will keep about 150 Shapell employees. Others with the company will continue to work for the family’s commercial real estate division, which wasn’t sold to Toll.