Seeking a "first-mover" advantage in what could be a new wave of home building operations roll-ups and combinations, Standard Pacific and Ryland announced last night that they plan to merge their companies as equals, forming an enterprise whose market capitalization would total $5.2 billion, and whose paired pro forma revenue rang up $5.1 billion over the last 12 months. The deal signals a "middle-innings" inflection point in home building's current recovery trajectory, where consolidation may well change the landscape of power players who control upwards of one of every three new homes built, marketed, and sold in America.
The past two-and-a-half years have brought their share of large, medium-sized, and single-market acquisition activity, as a host of companies went to the public equity and debt markets to raise capital, secure homesites for a visible land pipeline as purchase volume accelerated, and beef up operational capacity and talent to execute effectively and efficiently in each new operational arena.
A public-to-public merger, however, is a rare occurrence, often spoken about but seldom done, thanks in some part to the enormity of egos or fire-in-the-belly of executives running the respective public home building companies, and partly owing to the encumbrance of financial "goodwill" that sits on a newly-merged public company's balance sheet post-merger.
This merger pairs BUILDER's No. 11 ranked home builder (in unit sales volume) with Ryland, the No. 5 building enterprise in the 2015 BUILDER 100. Wall Street Journal staffer Kris Hudson reports on the merger here.
Prior to the Standard Pacific-Ryland, merger, the largest public-to-public deal in recent history was Pulte's $1.4 billion stock purchase of Centex in the Summer of 2009, while TRI Pointe's more recent $2.8 billion acquisition of the Weyerhaeuser portfolio of five private regional home building companies in June 2014 was technically not a public-to-public merger.
The StanPac-Ryland coup--which will result later in a brand new company and brand name as the deal closes--pairs two Southern California-based multi-regional firms, whose re-sculpted footprint would now cover 41 total metropolitan statistical areas in 538 active communities in 17 states, including 20 of the top 25 MSAs for new home construction, and a top-five Local Leaders position in 15 of those 20. Combined, the two companies own or control 74,000 lots, mapped to a widely diverse series of community and product price points and positions, ranging from entry-level to luxury.
Scale and timing are the touchpoint strategic advantage grip-holds executive leadership at Standard Pacific and Ryland emphasized in an exclusive conversation with BUILDER on Sunday night. The Standard Pacific press statement addresses facts and broad strategic statements from the respective executives, including a strong cultural match, felicitous hand-in-glove market positioning in terms of product price tiers and land positions, and strong focus and discipline in operating principles and practices. In this year's BIG BUILDER Public Builder Report Card, Ryland and Standard Pacific compared well with one another in operational strengths. The report notes:
The Ryland Group
After an A+ on our previous list, Ryland fell to a B. Still, the builder was second in operations and 10th in land. It posted the third lowest break-even units per month per community at 0.92 units. Ryland's revenue per employee is the fourth-highest among all builders at $1.7 million and its sales velocity of 0.6 units per month per community is the second-lowest. Among mid-sized home builders, Ryland has the second-highest home building gross margin of 21.9%. read more
Standard Pacific Corp.
Standard Pacific fell to a B this year, but it posted the top score in operations. The builder enjoys the highest revenue per employee of $1.9 million per employee. It also has the third highest home builder gross margin percentage among all builders at 25.6%. Of the West Coast builders, Standard Pacific had the lowest increase in community count. The company also led its West Coast cohorts in the lowest break-even units per month per community. read more
"This is the right move for our respective shareholders, as the combination will create value by strengthening our liquidity and improving operational efficiencies across the two enterprises," said Ryland chief executive officer Larry Nicholson, who will serve as the merged company's CEO and president. Nicholson says that he and Standard Pacific CEO Scott Stowell--who will step up to the role of executive chairman of the new, combined company--have chatted for years about doing ventures together. "In the recent conversations, we decided that this was the right move and that the moment had come, the time was right."
A question may arise as to what makes opportune timing for a consolidation move of this magnitude in an industry whose DNA has typically emphasized local economies over scalable national ones. To some extent, it's a belief that the market is entering a middle-innings, or mid-cycle stretch in the recovery, which changes companies' investment and operational focus from lot-pipeline expansion to an obsessive emphasis on monetization, inventory turns, pace, and profitable volume.
Stepping back even further from the fray and looking from the standpoint of how Federal Reserve policy and global financial investment capital flow may work, there may be no more advantageous time to access and put to use merger money than now, as the cost of funds may likely rise in the months ahead.
"You have to look carefully at the recovery cycle as it plays out," Scott Stowell told BUILDER in a phone conversation Sunday night. "You can move too early, or you can move too late. We think the moment is just right for this combination. We're two of the better companies among our peers, and we'd rather be an early-mover in this process than wait and not have such a strong, strategic option."
UBS home building equities analyst Susan Maklari writes on the topic of further public-to-public consolidation via M&A activity:
We expected the trend of public-to-public M&A to expand. Our view considers: 1) a moderate recovery increases the focus on cost controls and driving overhead leverage (we'd note mgmt. of the new combined entity expects to realize annual cost savings of $50-70mn by late 2016); 2) the land environment makes it harder for builders to operate as asset light companies and the lack of developers hinders their ability to grow quickly; 3) DTAs have been brought back on balance sheet (for both SPF & RYL) and companies are growing assets and utilizing them.