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Analysts say:
Schuler should
feel right at home
with deal

The purchase of a California
firm is expected to fortify the
Honolulu-based company's
operations in the West

---

By Rob Perez
Star-Bulletin

Schuler Homes Inc.'s planned acquisition of Western Pacific Housing is a smart move that will immediately give the Honolulu-based company a significant presence in one of the country's largest and fastest-growing housing markets, analysts say.

"They'd instantly be a major player in California," said Dean Wehrli, managing director of The Meyers Group, a new-homes consulting company based in Irvine, Calif.

Western Pacific is the sixth-largest home builder in California, having produced more than 1,000 mostly single-family homes from January through July of this year, Wehrli said.

James Schuler, president and chief executive of Schuler, valued the all-stock deal at roughly $380 million, based on Schuler's closing price of $9 a share yesterday.

Investors in Western Pacific, a privately held firm, would get roughly the same amount of shares in the combined company as Schuler stockholders, but the class of shares would be different and have only half the voting rights.

The combined company, based on their individual performances for the 12 months ended June 30, would have revenue topping $1 billion and be among the 15 largest home builders in the country.

Wall Street, however, wasn't thrilled with the deal, which was announced after the market closed yesterday. Schuler's Nasdaq-traded stock fell 63 cents, or about 7 percent, to $8.38 at midday on Wall Street. It is not usual for shares of acquiring companies to fall upon news of a big merger.

Analysts said the deal makes sense for Schuler, which has diversified its operations over the past four years -- primarily through acquisitions -- to the Western United States. It builds homes in Oregon, Washington, Colorado, Arizona, California and Hawaii.

Richard Dole of Dole Capital LLC, a private equity investment banking firm, said the merger will better position Schuler to manage its far-flung operations throughout the West.

"They'll have more management depth," Dole said.

It also will double the size of Schuler, eventually making it more attractive to institutional investors who sometimes shun small-company investments, Dole said.

Schuler reported revenue of $506.8 million last year, closing roughly 2,600 home sales. Western Pacific closed nearly 1,700 sales in its fiscal year ended March 31, generating revenue of $550.9 million.

Because Schuler's presence in California is minor, the merger will create little duplication in operations and management, according to James Schuler, who will retain his title as president and CEO of the combined entity. He also will serve as co-chairman of the merged company, which will retain the Schuler Homes name and continue to be based in Honolulu. Eugene Rosenfeld, Western Pacific's founder, chairman and CEO, also will serve as co-chairman.

Schuler said he doesn't expect local layoffs as a result of the deal, which is subject to regulatory and shareholder approvals and is expected to close by early next year.

"This is really not about cutting costs and saving money," he said. "It's really about opportunity and growth."

Schuler said it would have taken the company several years and multiple smaller acquisitions to achieve the same growth it is getting in this deal. "This is a big leap for us."

With both companies having similar revenue and earnings, "We really view this as a merger of equals," he added.

Current Schuler shareholders, however, will elect five of the nine board members of the new company, effectively giving them control. James Schuler owns 52 percent of Schuler's outstanding stock.

Rosenfeld said in a statement that the merger will enable Western Pacific investors to enjoy the benefits of ownership in a publicly traded company that will be highly ranked among U.S. builders in terms of profitability and capitalization.

Schuler's ability to pull off an all-stock deal has been buoyed by a recent rise in its share price. Since the end of July, Schuler is up roughly 37 percent. It shot up to a 52-week high of $11.50 on Thursday but has retreated since.

Wehrli said Schuler is acquiring a company with a solid reputation for building quality homes in mid-market price ranges. "They do good stuff," he said of Western Pacific.

In anticipation of the deal closing, Schuler disclosed it will increase product offerings in Hawaii while reducing investments in certain areas, such as Maili on Oahu, where it has extensive land holdings.

In those areas, the company intends to sell some land to other builders and developers, Schuler said.

Reflecting lower values on the land, the company expects to take an after-tax writedown of about $22 million during the current quarter ending Sept. 30, he said.