You need to look to other numbers--particularly the ones showing cash flow--to understand why Beacon Roofing Supply wants to acquire Roofing Supply Group even though RSG has accumulated $143 million in net losses over the 37-month period ended June 30, Beacon's chief financial officer says.
"There's a [difference between a] book loss and a cash loss," Joseph Nowicki told ProSales in an interview on Sept. 11. In RSG, he said, "There's a very positive cash flow. In addition to that, you will be able to lower the amount of interest expense. In addition to that, because we're combining we'll have roughly $50 million in annual synergies. Plus on top of that there's a significant amount--$180 million--in net operating losses we can use."
Along with all that, "Roofing has been soft but it's starting to turn, and we think this is a good time to take advantage."
Beacon announced July 27 that it intends to acquire RSG in a cash and stock transaction valued at roughly $1.14 billion. Nowicki's Sept. 11 comments came two days after Beacon filed documents with the Securities and Exchange Commission in connection with the sale. Those documents provide key insights into RSG's operations during the three years since it was acquired by the investment firm Clayton, Dubilier & Rice (CD&R).
That SEC filing showed that RSG had recorded a $4.4 million net profit on $353.8 million in sales for the first five months of of 2012 before a CD&R unit called CDRR Investors Inc. bought it. Over the next seven months, however, the CDRR-owned version of RSG posted $589.2 million in sales but a net loss of $24 million.
In 2013, sales climbed to $999 million, but the net losses deepened to $65 million. And for 2014, sales reached $1.11 billion while net losses lightened to $33.3 million. And for the first six months of this year, RSG's sales totaled $567.8 million while net losses totaled $20.9 million.
Nowicki said observers watching this deal shouldn't focus on the net profit/loss line, because when private equity firms run companies they pay more attention to EBITDA--earnings before interest, taxes, depreciation, and amortization. EBITDA is a popular measure of cash flow.
In RSG's case, Nowicki pointed out, the $30.5 million in net loss recorded during the 12-month period ended June 30 includes $9.8 million in income tax payments, $46.7 million in depreciation and amortization costs, and $42.8 million in interest payments. CD&R bought RSG in 2012 for $700 million largely via borrowed money, and the liabilities side of its balance sheet shows nearly $502 million in senior and term loan debt.
When you look at earnings before those taxes, interest payments, depreciation, and amortization, RSG shows a positive EBITDA of $68.7 million for the 12-month period ended in June, Nowicki noted. That helps show why the company is so attractive, he said.
Herndon, Va.-based Beacon will pay RSG shareholders about $286 million in cash and roughly $291 million in Beacon common stock. Beacon, the No. 3 company on the ProSales 100, also will refinance about $565 million of RSG's net debt. RSG paid about 8% annual interest while Beacon pays about 4%, Nowicki said, so its interest payments will be lower than RSG's was under CDRR.
RSG also has accumulated $180 million in net operating losses, Nowicki said. CDRR's cash-flow orientation led it to not apply those past losses to more recent profits as a way to cut its tax bill, he said, but Beacon can and will employ those losses.
Then there are operating synergies. Beacon stressed at the time that the deal adds 83 locations across 24 states to Beacon's portfolio, growing it to roughly $3.7 billion in revenues from 356 branches in 45 states and six Canadian provinces. ( See map below.)
"There's about $50 million in annual synergies," Nowicki said. "We're able to buy better than they do today, eliminate some rental costs, eliminate overhead costs. We'll be able to improve their bottom line."