Wall Street today hailed Builders FirstSource's (BFS) plan to buy ProBuild by sending BFS shares soaring 68% to a near 52-week high of $11.57. Meanwhile, industry executives saw good omens for both the industry and themselves in the $1.63 billion deal.
“Typically, in an acquisition scenario, the company doing the acquiring trades down upon the announcement of an acquisition," noted Michael Collins, a partner with Building Industry Advisers and author of ProSales' "Big Deals" column. "The fact that this is an all-cash deal not only is a signal that Builders FirstSource is in excellent financial condition, it means that they’ve sent a very strong signal to the market that they consider their stock to be undervalued. If they thought their stock was at a relative peak, we would have seen a heavy stock component to this deal. Completing this transaction as an all-cash offering essentially means that Builders FirstSource considers its own stock to be too attractive to part with.”
Other analysts and LBM executives--all of whom spoke to ProSales on condition of anonymity--in particular cheered reports that BFS's purchase price amounted to 10 to 11 times ProBuild's annual earnings, which in EBITDA (earnings before interest, taxes, depreciation, and amortization) terms they figured was about 3% to 4% of revenues. That 10x to 11x is a higher multiple than might be paid for other companies. On the other hand, the fact that there's any multiple at all implies ProBuild has begun turning a profit after a multi-year streak in which the company is believed to have incurred losses totaling hundreds of millions of dollars, perhaps even more than $1 billion. The $1.63 billion price tag also suggests that private equity feels good about LBM's prospects, they said.
Today's announcement starts the process that by year's end could produce the biggest LBM operation America has ever seen. A combined BFS/ProBuild operation encompassed $6.1 billion in total sales for 2014, roughly 525 locations, and stores in 40 states as well as in 24 of the top 25 metro areas. So, what will the deal do to the building material market? The impact ultimately could be beneficial, several experts said.
"The short-term impact will probably be good for whoever competes with the two chains," opined Greg Brooks, a former ProSales editor and now the owner of his own LBM consultancy. He said that folding ProBuild's far-flung operations "will keep someone very busy for a while," and BFS executives will need to figure out what to do with potentially duplicative operations in at least nine marks. "Wherever redundant facilities are closed, those closings will put good people on the street and into the arms of competitors," he wrote.
Markets in which competing BFS and ProBuild sales reps bid down the price of jobs could end up seeing higher margins on projects, Brooks added. And finally, he pointed out "the general anxiety that always goes with an acquisition. Salespeople worry about changes to compensation plans. Managers and admin personnel have to learn new policies and procedures (and maybe a new ERP system). Purchasing programs get re-negotiated and product lines get trimmed. It all goes with the territory, but no matter how you slice it, it’s a disruption competitors can and will exploit."
Another expert questioned pro forma net debt of $2.1 billion, including lease obligations, that a combined company would have on its books. . For its part, BFS says it believes it will generate "significant cash flow" through cost savings, higher earnings, and strong free cash flow generation from operations.