Credit Suisse Steps To The Sidelines: Upgrades Ryland, Downgrades Standard Pacific

In a report published Tuesday, Credit Suisse analyst Michael Dahl changed the ratings on Standard Pacific Corp. SPF and Ryland Group Inc RYL, after the companies announced a merger of equals. The rating on Standard Pacific was downgraded from Outperform to Neutral, while the price target was maintained at $9.50. "While we recognize the strategic reasoning behind the acquisition of RYL (larger scale, diversification, liquidity) and appreciate management's track record of execution, we believe that integration risk in combination with a relatively full valuation based on our initial pro-forma projections for earnings and book value create a less favorable risk/reward profile," analyst Michael Dahl wrote. The deal is expected to be dilutive in the near term and "largely neutral" in 2016. Excluding purchase accounting and integration costs, the acquisition is expected to begin being accretive in 2017. "We believe, however, that '16 EPS will be negatively impacted by ~$0.44 inclusive of purchase accounting (we est. a 110 bps GM headwind) and integration costs," Dahl added. The rating on Ryland Group was upgraded from Underperform to Neutral, while the price target was raised from $37 to $48.40. According to the terms of the transaction, one share of Ryland is set at a fixed exchange rate of 5.0957 shares of SPF common stock. This links Ryland's value to the underlying performance of Standard Pacific. The deal is expected to close in early Fall this year. In the report Credit Suisse noted, "We think current valuation accurately reflects both combined long-term strategic benefits and potential integration risks."