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Armstrong's (AWI) EMEA-Pacific Rim Divestiture Gets EC Nod

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European Commission (“EC”) approved the proposed sale of Armstrong World Industries, Inc.'s (AWI - Free Report) businesses in EMEA (Europe, the Middle East and Africa) and the Pacific Rim to German-based building material company, Knauf International GmbH, subject to certain conditions. This move addresses EC’s apprehension that the Armstrong-Knauf deal would significantly reduce the level of competition in certain markets, as well as lead to increased prices for commercial and public customers.

Let’s Delve Deeper

Notably, Armstrong World has a joint venture (“JV”) with Worthington Industries, Inc. (WOR - Free Report) , known as Worthington Armstrong Venture or WAVE, in which both hold a 50% interest. This 25-year old JV operates nine manufacturing locations in five countries to produce suspension system (grid) products.

In November 2017, Armstrong World agreed to offload its ceiling tile operations and stake in the WAVE ceiling-grid JV in Europe (including Russia), the Middle East, Africa and the Pacific Rim (including China) to Knauf for $330 million.

However, the EU was concerned that the proposed acquisition would significantly reduce the level of competition in the markets for mineral fiber tiles for modular suspended ceiling products (in Austria, Lithuania, Spain and the United Kingdom) and grids for modular suspended ceiling products (in Austria, Spain and the United Kingdom).

Owing to this concern, Knauf said that it would immediately divest Armstrong World’s plants for the production of mineral fiber tiles and grids in Team Valley, England, to an unidentified company, upon the completion of the deal, which is expected in the first half of 2019.

Knauf also added that it would transfer to the company the Armstrong World’s sales teams and customer base in Austria, Lithuania, Spain, United Kingdom, Estonia, Germany, Ireland, Italy, Latvia, Portugal, and Turkey.

Equity earnings from Armstrong World’s WAVE JV came in at $59.2 million during the first nine months of 2018 compared with $51.9 million in the year-ago period. The improvement was attributable to higher sales, primarily related to increases in AUV, partly offset by higher input costs, particularly steel.

This divestiture will allow Armstrong World to focus on investments and resources on its core ceilings and walls businesses in the United States, Canada and Latin America.

Solid Performance & Prospects

Over the past year, Armstrong World’s shares have gained 7.4% against 28.3% decline of the industry it belongs to. Also, earnings estimates for 2018 and 2019 have moved 0.3% and 0.2% north, respectively, over the past 60 days. Although the company missed the consensus mark in the trailing four quarters, it has been recording solid year-over-year improvement, buoyed by volume growth in the Architectural Specialties segment and higher AUVs in the Mineral Fiber segment. In fact, the company’s net sales grew 8.4% in the first nine months of 2018, mainly driven by solid volume growth, positive pricing and mix, along with favorable AUVs.

Zacks Rank & Key Picks

Armstrong World currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the Construction sector include Great Lakes Dredge & Dock Corporation (GLDD - Free Report) and EMCOR Group, Inc. (EME - Free Report) . While Great Lakes Dredge & Dock sports a Zacks Rank #1 (Strong Buy), EMCOR carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes Dredge & Dock has an expected earnings growth rate of 111.1% for the current year.

EMCOR has a long-term earnings growth rate of 15%.

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