Is The Standard Pacific-Ryland Merger Worth Buying?

In a report published Wednesday, FBR Capital Markets analyst Patrick Kealey, Jr. put a Market Perform rating on both

and

after the companies announced a merger of equals. The rating on Standard Pacific was downgraded from Outperform to Market Perform, while the price target was maintained at $9.50. Analyst Patrick Kealey believes that the "combined platform's potential upside appears to be already reflected in the current valuation." The proposed merger of the two companies is expected to result in the creation of "one of the largest builders in the U.S. by closings, and its broad geographic footprint and various product offerings will be a driver to capturing growth while also diversifying revenues and earnings," Kealey mentioned. In the report FBR Capital Markets noted, "The builder will have a large geographic footprint, with exposure to 41 MSAs in 17 different markets, and will be a top five market share builder in 15 of the top 25 U.S. MSAs. The new builder will offer products in entry level, move-up, luxury, and active adult, with each likely playing a key part in long-term growth." The management team of the merged company is expected to carry out the transition smoothly and thus drive strong shareholders returns over the long term. "However, we believe valuation levels of SPF and RYL are currently reflecting the company's more near-term earnings potential," Kealey added. The rating on Ryland Group was maintained at Market Perform, while the price target was raised from $41 to $48. The synergies of the merged entity are expected to result in annualized savings of $50 million to $70 million, but these efficiencies will be realized from end 2016 onwards. "Management believes the new platform is well positioned for the coming years and therefore will be looking at returning capital to shareholders as the platform generates additional cash flow. In the near term, RYL currently maintains a dividend, and subject to board authorization, the new platform plans on continuing with that policy," the report added.