The mega-merger between Standard Pacific Corp. and Ryland Group will create the fourth-largest U.S. homebuilder and could be the first in a spate of consolidations in the industry.
“A public-to-public merger… 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,” John McManus, editorial director for the Residential Construction Group at Hanley Wood, the publisher of Builder magazine, wrote the morning after the two companies’ Sunday evening announcement.
Yet executives of Standard Pacific — ranked No. 5 for most homes sold on the magazine’s 2015 Builder 100 list, with Ryland at No. 11 — told The Wall Street Journal they expect their merger to lead to others.
“Industry insiders have often speculated about why there isn’t more consolidation… among homebuilders,” Standard Pacific Chief Executive Scott Stowell said in an interview with Kris Hudson, a real estate writer with The Journal. “For our companies, the time is now for this to happen.”
Bigger is better
Housing analysts and observers seem to agree that bigger could be better for homebuilders vying for scarce available land and, in the case of publicly traded builders like Standard Pacific and Ryland, for attention from institutional investors with almost two dozen building companies to choose among.
Until 2013, the newly merged builders were in the company of just 14 competitors with publicly traded stock. That year, eight more went public.
“That’s too many, some analysts say, for all but the largest and best-run to get the attention of institutional investors,” wrote Hudson, who noted that the competition for investors “factored heavily” into the decision leading to the deal between Standard Pacific and Ryland, whose new company will reportedly be worth $5.2 billion. “Being a mid-cap builder wasn’t good enough anymore.”
“Good enough” in this case, means “big enough.” And at least for public builders, their response to Sunday night’s deal could be to bulk up.
The last consolidation of two large, publicly traded builders was in 2009, when Pulte purchased $1.4 billion worth of Centex stock, making Centex a wholly owned subsidiary of the third-largest U.S. builder.
McManus made some predictions about which builders might be next to acquire or merge their way into better positions on Wall Street. He said big builders Toll Brothers and TRI Pointe — both considerably larger because of mega-deals of their own over the past couple of years, could be prime targets of the Top 3 U.S. builders — D.R. Horton, Lennar and Pulte, whom McManus called “natural suitors.”
Meritage, Brookfield Residential and NVR have tried but failed to make major acquisitions and might be in the mood to try again; Taylor Morrison has indicated it is looking to grow; and LGI, Century and UPC, McManus predicted, might not survive on their own “if they don’t make a big-time buy soon.”
Builders likely to be courted include: Hovnanian, KB Home, Beazer, M/I Homes, William Lyon Homes and WCI, whom McManus characterized as “more constrained by their capital structure.”
Regardless of which builders merge or sell, McManus says at least some deals are “inevitable.”
While a merger of the scale of the Standard Pacific/Ryland deal is rare, consolidation within the homebuilding industry isn’t new. Between 2012 and 2014, more than 20 mergers and acquisitions occurred in the industry in an effort by builders to create shareholder value, grab land and operate more efficiently.
The most recent merger, which will result in a new name for the joined companies, could save the firms $50 million to $70 million by late 2016, they said in a statement on Sunday.
“Combining two industry leaders with nearly 100 years of homebuilding experience between them puts us in a strong position to benefit from the continued housing market recovery,” Stowell said 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 combined entity will have a presence in 538 active communities in 17 states and own or control 74,000 lots. Their homes will range in price from entry-level to luxury.
Stowell told McManus in an interview that the timing was right to take action, given the slow pace of the housing recovery. "You can move too early, or you can move too late,” he said. “We'd rather be an early-mover in this process than wait and not have such a strong, strategic option."
Wall Street seemed to approve: During a day when stocks all over the world took a hit after Greece failed to reach a debt deal, public homebuilders enjoyed a good day. Ryland and Standard Pacific stock jumped more than 6% in reaction to the high-profile deal and to a National Association of Home Builders report showing builder optimism outpaced expectations in June.