On Sunday, two giant homebuilders of USA Standard Pacific and The Ryland Group have announced a merger of equal in a deal. The two companies combine to form a single organization that would value the company at $5.2 billion or $8.2 billion including the debt.
Based in Southern California, Standard Pacific and Ryland when combined is expected to hold or control 74,000 homesites and the merging will combine an upscale builder with it lower-priced peer to form an organization that sold 12,633 homes last year. That makes it move to the fourth position in the market after D.R. Horton Inc., Lennar Corp. and PulteGroup Inc. in annual closings and would give the companies an upper hand with investors, land sellers and lenders. Also, the companies expect to save around $50 million to $70 million a year.
“Combining two industry leaders with nearly 100 years of homebuilding experience between then puts us in strong position to benefit from the continued housing market recovery,” said the CEO of Standard Pacific Scott Stowell in a statement. “With this merger we gain both geographic and product diversification, expanding our reach and enhancing our growth prospects in the entry-level, move-up and luxury market segments.”
The executive of the company revealed that the deal would be a merger of equals with the all-stock combination. The stake of the companies would be 59% and 41% which would be held by Standard Pacific shareholders and Ryland’s shareholders respectively. In the agreement of the deal, Standard Pacific will implement a 1-for-5 reverse stock split, so that each 5 shares will be combined into 1 share and Ryland shareholders will be given 1.0191 of these shares for each share of Ryland stock. The fraction portion of the share will be paid in cash for the shareholders.
Five members would be appointed from both the companies to be part of the already existing 10 member board. Stowell would serve as executive chairman of the new company while CEO of Ryland Larry Nicholson would become CEO and the president of the yet-to-be-named new company. The exchange ratio of the company was calculated on the basis of 28-day volume weighted price from May 5 to Friday.
“We are out in front of what we think will be a wave of consolidation in our industry,” said Stowell. He also added, “The timing is attractive. We think we are in the middle innings of the housing recovery.”
The merger comes just in the time of recovery of the home-building industry where the growth has been hampered in the past years due to moderate job growth in 2012 and 2013, weak wages, strict mortgage-qualification standards, and increasing student loans for young home buyers. Though the new-home sales have increased from spring, the overall national sales pace has only reached 71% of the annual average since 2000. The builders and economists are waiting patiently for the economy to hit its peak.
“We expect to see slow, steady growth over the next couple of years,” said Nicholson. “When you put the two together with their synergies, it produces a better balance sheet and better returns for shareholders. We’d rather be a leader than a follower in industry consolidation.” John Burns of John Burns Real Estate Consulting Inc. said the merger would bring in flexibility for Matlin Patterson Global Advisors, the company that invested million dollars in Standard Pacific in 2008 and 2009 and now is its largest shareholder with 54% stake which is soon to fall to 31% after the merger.
“Today our industry reaches a significant milestone as two of its best operators combine forces,” said Nicholson in a statement. “With similar cultures and long histories of crafting quality homes and providing superior customer service, we are each proud of where we have been and look to the future confident that we will be better together.”