Beacon Roofing Supply Inc. (BECN - Free Report) shares jumped 9.84% in a day following the announcement that it has struck a deal to acquire CRH plc's U.S distribution business, Allied Building Products Corp. for $2.625 billion in cash. The buyout will not only broaden product offerings, but also increase geographical reach in both existing and new markets. Further, it will lead to significant cost synergies.
Dublin, Ireland-based CRH is the largest building materials company in North America and the second largest worldwide. Its subsidiary, Allied Building Products is one of the country’s largest exterior and interior building products distributors. It distributes products which include exterior products, such as roofing, siding, windows and doors, and interior products, such as wallboard and suspended ceiling systems, across 208 locations in 31 states.
The deal is anticipated to close Jan 2, 2018, pursuant to customary closing conditions. The acquisition will catapult Beacon Roofing to one of the largest public wholesale building materials distributors in North America. It will have 593 branches in six provinces across Canada and in all 50 states, expanding foothold in other key markets including Texas, Florida, Colorado and California. Through the Allied acquisition, Beacon Roofing would mark its foray in local markets in the New York, New Jersey and Upper Midwest.
With projected revenues of roughly $7 billion from the combined company, it will be 69% increase the company's annual revenues from current levels and add about 50-60 cents incremental to earnings per share in the first year. However, this does not include incremental transaction-related amortization costs of $70-$80 million and acquisition costs of $65-$75 million in the first year after the combination. The combined company is anticipated to realize $110 million in run-rate synergies within two years of the closure of the deal.
In addition to growing its roofing supplies business, Allied Building will add a wallboard and acoustical ceiling tile wholesale business to Beacon Roofing, making it the fourth largest distributor of such products in the United States, with more than $1 billion of revenues in the interior market category. The company will gain foothold in the robust, growing and still-consolidating interior products market. The acquisition will also help boost growth in other key product categories, including siding, windows, doors, decking, trim, waterproofing, insulation and solar. Through the combination, Beacon Roofing will be able to capitalize on Allied’s various market advantages, including established private-label business and strong e-commerce platform, to deliver its organic growth strategies.
Beacon Roofing intends to fund the acquisition by taking up debt of approximately $2.7 billion, which will result in escalation of its total debt to $3.9 billion. Consequently, this will lead to a concerning debt to capitalization ratio of 74%, a massive jump from the current 46%. Further, given the size of the acquisition, integration risks also remain.
Beacon Roofing underperformed the industry with respect to the year-to-date price performance. The stock dipped 5.5%, while the industry recorded growth of 6.8%.
The company’s revenues in fiscal 2017 will bear the impact of lower-than-expected sales rate in the third quarter due to higher rain and more limited re-roof work as a result of milder winter weather. The drag effect from the last winter will continue in certain northern markets, impacting fourth-quarter’s sales. The company guides adjusted earnings per share between $2.15 and $2.25 for 2017.
The commercial roofing market has been experiencing competitive pricing pressures recently. Year-over-year comparisons in the Southwest will remain difficult during the coming quarters and Eastern Canada will be impacted by competitive pressure; limited big project work along with the increased levels of rain and consecutive mild winters. Lower capital expenditure, increased competition remain headwinds.
Beacon Roofing currently carries a Zacks Rank #4 (Sell).
Stocks to Consider
Some better-ranked stocks worth considering in the sector include The Home Depot, Inc. (HD - Free Report) and Lumber Liquidators Holdings, Inc. (LL - Free Report) . Both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The fiscal 2017 Zacks Consensus estimate for earnings for Home Depot is at $7.30, reflecting year-over-year growth of 13.19%. The Zacks Consensus Estimate for Lumber Liquidators for fiscal 2017 is at a loss of 69 cents, a considerable improvement from the loss of $2.51 in the prior fiscal.
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