One day after Builders FirstSource (BFS) announced it would acquire ProBuild and thus create America's biggest building material supplier (see original story), here's a roundup of reactions and insights:
Stock Market Remains Bullish. Shares in BFS rose another 17.5% today to reach $13.59 after having climbed 68% the day before. BFS stock now is worth more than double what it was two days ago. "They were overvalued before the announcement and now it's gone crazy," said one LBM executive, all of whom spoke to ProSales on conditions of anonymity, as a number of them compete with BFS and ProBuild.
What About the Debt? Stock analysts and LBM executives who analyzed a proxy statement BFS issued in conjunction with its announcement noted that Builders FirstSource's claim of an all-cash transaction doesn't mean this deal is as simple as taking money out of a safe. Builders FirstSource "is issuing approximately $1.5 billion in debt to finance this deal, split into senior secured notes, senior unsecured notes, and an [asset-based lending] facility," analyst Lester Goh noted. "The remainder is financed through an eventual equity offering amounting to $100 million."
What About Leases? Many of ProBuild's 364 facilities were leased from companies like Lanoga, whose firms provided the ingredients for what became ProBuild in 2006. One page of BFS' presentation to investors on April 13 declares at the top that the combined BFS/ProBuild would have a pro forma net funded debt of $1.79 billion. But a footnote says that figure "excludes assumed and existing lease finance obligations of $304 million." As one LBM executive asked: "How are they going to make that disappear?"
Price Relief "[C]onsolidation could be good for LBM dealer margins ... and even the new company's bottom line," Matt Layman, an expert on lumber pricing, said on ProSales' LinkedIn site. "For a decade, independent dealers have struggled against BFS and ProBuild low margins on framing lumber packages. Certainly, these two companies have beaten each other up as well." Several others seconded Layman's view. ProBuild in particular has generated complaints from dealers about selling lumber at sinfully low gross margins.
Unreal ProBuild EBITDA? Those excluded lease obligations also figure in BFS' reports on ProBuild's EBITDA--earnings before interest, taxes, depreciation, and amortization. BFS documents consistently put ProBuild's EBITDA at $190 million, or 4.3% of $4.43 billion in sales during 2014. Critics believe ProBuild's actual EBITDA is lower, perhaps $70 million less, in part because of those leases.
Efficiency Claims "A driving force for the creation of ProBuild, BFS, etc. is the concept that scale leads to efficiency," remarked Bill Tucker, a consultant who formerly ran the Florida Building Material Association. But Tucker pointed out that that a building supply dealer’s efficiency also depends upon the efficiency of its customers. "With numerous uncontrollable variables—weather, subs, material delivery, owners, designers, etc.—builders are not efficient—effective without wasting time or effort or expense—customers," Tucker said. "As one industry wag put it, 'You are only as efficient as the job you are delivering to today.'"
Savings Plan BFS forecasts recurring cost savings of $110 million in the third year after the merger and after one-time costs of $90 million to $100 million. It expects to get 45% of those savings from general and administrative expenditures, 20% from network consolidation, and 35% from improved procurement. Skeptics question those expectations, saying that bigger companies often end up with bigger-than-envisioned overhead costs. For its part, BFS argues it "has successfully acquired and integrated 35 businesses since its inception."
Turmoil in the Ranks A combined BFS/ProBuild has roughly 450 facilities in 40 states from Florida to Alaska. The two companies' footprints overlap in nine states, particularly Texas and the Carolinas. The two companies' rivals look forward to the coming shakeout of people and facilities, as every departure and every closure represents the opportunity to acquire good people and good property. BFS and ProBuild workers who are let go also will help fill the parched talent pipeline and possibly could help cause salaries to moderate.