Usually mergers get a lot of coverage, and often they come with large premiums for shareholders. News that Standard Pacific Corp. (NYSE: SPF) and Ryland Group Inc. (NYSE: RYL) are merging is not one of those instances due to it being touted as a merger of equals. What may matter more than this particular merger is whether this could be the beginning of more mergers that could consolidate the largest homebuilders in the nation.
24/7 Wall St. has identified the basics of the merger announcement, but the real focus will be on the other, smaller homebuilders that might be acquired by the larger players.
After looking at the size differences here, the reality is that if buyouts were to come, there are four larger players and three smaller players to consider. The larger companies by market cap than the merger of equals are DR Horton Inc. (NYSE: DHI), Lennar Corp. (NYSE: LEN), PulteGroup Inc. (NYSE: PHM) and Toll Brothers Inc. (NYSE: TOL).
The smaller companies by market cap are Meritage Homes Corp. (NYSE: MTH), MDC Holdings Inc. (NYSE: MDC), and KB Home (NYSE: KBH). More detail on each has been provided afterward.
The first thing to consider in homebuilder mergers is that operators are not as interested in buying other operators just for current housing inventory, and current revenue and earnings. That can end very soon. What homebuilders are generally more interested in than today’s operations is the value of the “land bank” assets; that is, future community sites that can be built on in the years and decades ahead as population growth comes.
As far as Ryland and Standard Pacific, Ryland’s market cap was $2.0 billion and Standard Pacific was worth $2.3 billion. Standard Pacific’s 2014 revenue was $2.435 billion and for Ryland $2.615 billion. Operating income in 2014 was $351.0 million for Standard Pacific and $280.5 million for Ryland. The companies gave the following pro forma combined numbers:
- Combined equity market capitalization of approximately $5.2 billion
- Combined enterprise value of approximately $8.2 billion
- Will own or control approximately 74,000 home sites
- In the 12 months ended March 31, 2015, delivered more than 12,600 homes in the aggregate with revenues of $5.1 billion
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Standard Pacific will implement a reverse stock split at the time of the merger, wherein each five shares of Standard Pacific common stock will be combined into one share of Standard Pacific common stock. Ryland shareholders will then receive 1.0191 shares of Standard Pacific common stock for each share of Ryland (or 5.0957 shares prior to the reverse stock split). The companies noted that fractional shares will be paid out in cash.
A report from Credit Suisse showed that the deal will drive long-term strategic positives, although integration risks and costs, as well as initial margin headwinds and relatively full valuations, may temper the reactions here. The firm also noted that this deal will give a top five market share in 15 of the top 25 metropolitan statistical areas (MSAs), with nine markets coming with over 10% local market share. From an accounting standpoint, Standard Pacific is the acquirer and Ryland’s balance sheet will be marked to fair value.
Below is a review of each of the four larger homebuilders we follow, as well as the three smaller ones.
DR Horton Inc. (NYSE: DHI) shares closed Friday at $26.71, in a 52-week trading range of $19.29 to $29.29. The stock has a consensus analyst price target of $28.89. DR Horton has a market cap of nearly $10 billion. Revenue in 2014 was $8.02 billion.
Lennar Corp. (NYSE: LEN) shares closed Friday at $47.44. The consensus analyst price target is $51.24, and the 52-week trading range is $35.74 to $53.67. The company’s market cap is almost $10 billion. Revenue in 2014 was $7.78 billion.
PulteGroup Inc. (NYSE: PHM) shares closed Friday at $19.27, within a 52-week range of $16.56 to $23.36. The consensus analyst price target is $22.85, and the market cap is $7 billion. Revenue in 2014 totaled $5.82 billion, and Pulte has made an acquisition in the past.
Toll Brothers Inc. (NYSE: TOL) shares closed Friday at $37.29. The consensus price target is $38.97, and the 52-week range is $28.92 to $40.33. Toll Brothers has a market cap of over $6 billion. Revenue in 2014 was $3.91 billion.
As you will see, the smaller companies are much smaller.
Meritage Homes Corp. (NYSE: MTH) shares closed Friday $44.62, in a 52-week trading range of $31.69 to $49.90. The stock has a consensus analyst price target of $46.09. The market cap is roughly $2 billion. Meritage’s revenue in 2014 was $2.18 billion.
MDC Holdings Inc. (NYSE: MDC) shares closed Friday at $28.74. The consensus price target is $27.86, and the 52-week range of $23.67 to $30.86. The company has a market cap of over $1 billion. Revenue in 2014 was $1.69 billion.
KB Home (NYSE: KBH) shares closed Friday at $14.91, within a 52-week range of $11.76 to $18.98. The consensus price target is $16.35 and the market cap is more than $1 billion. Revenue for KB Home was $2.4 billion in 2014.
Again, most likely for homebuilders to want to acquire another operator the focus would be on the “land bank” holdings. If operators are going to merge like Standard Pacific and Ryland, then the back office savings from the operations would have to be the goal.
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