Related Stories

Stock Building Supply, America's second-biggest LBM company, filed a Chapter 11 bankruptcy petition today shortly after its U.K.-based parent, Wolseley Plc, sold 51% of the company to a private equity group.
A federal bankruptcy judge in Delaware will hear Stock's case at 3 p.m. ET Thursday, according to a notice from Stock's attorneys. (Click here for filings and notices. In addition, Stock has set up an information page on its website.) The hearing will mainly regard typical first-day motions, such as setting times to hear requests to continue to pay utility bills and taxes. Eventually the court will take up stickier issues, such as Stock's request to terminate lease agreements at roughly 155 facilities that Stock either has closed since 2007 or intended to close soon.

Related articles:
* Exec for new majority owner says it expect to help Stock grow. Story
* Expect more yard closures, Stock's leaders say. Story
* Wolseley to book $262 million loss on the deal. Story
* Stock's Chapter 11 filing documents. Web page
* Timeline of Stock's acquisitions since 1985. Timeline
* What is The Gores Group? Apparently, it's a newcomer to the residential construction supply world. Story

The hearing plans came a half day after Wolseley announced the joint venture with an affiliate of The Gores Group of Los Angeles.

"We are very excited about today's announcement and look forward to working with Gores to develop the business," Stock president Joe Appelmann said in a statement. "Gores' strong operational expertise and focus will help position the company during this unprecedented downturn and to outperform the market." A press spokesman said Appelmann was unavailable for media interviews.

The deal calls for Gores to invest $75 million in Stock and provide a $125 million revolving credit bridge facility. The investment also calls for Stock to enter Chapter 11 for 45 to 60 days and then come out of it.

"The bankruptcy provides Stock with the flexibility to shed the company's operations associated with its closed locations and underperforming markets as well as inject fresh, needed capital," a statement from Stock said. "The new capital is intended to ensure a stable ongoing business model as well as permit the company to pay all of its creditors their claims in full as allowed by the bankruptcy laws.

"Integral to the pre-packaged plan is the stipulation that all trade creditors, suppliers, customers and employees will receive the full allowed amounts owed to them," the statement added. "As a result, creditors are not required to vote on the plan."

According to a summary of the deal posted on Wolseley's website, the British company sold 100% of the shares of Stock Building Supply Holdings LLC to a joint venture company ("NewCo") in exchange for 49% of the common equity of NewCo and nominal consideration (listed in the Chapter 11 petition as $1,000). The Gores Group will control NewCo and Wolseley will get two board seats out of a total of seven.

"The business will continue to use the Stock Building Supply brand, and be led by the existing Stock management team including Joe Appelmann as president," Wolseley's summary added. "The transaction gives Stock a positive future with a new partner whilst Wolseley's minority interest in NewCo preserves Wolseley shareholders' ability to participate in the long-term value potential of the business and strengthens the Group's financial position."

Stock is America's No. 2 building supply company, with operations in 27 states; Wolseley bought it in 1986 when Stock was still known as Carolina Builders. In the just-released ProSales 100 report, Stock said it had sales totaling $3.2 billion in calendar year 2008. In the six months through Jan. 31--the first half of its current fiscal year--Stock's revenue fell 25.5% to $1.34 billion, leading the company to record an operating loss of $129 million. Its employee count has shrank from 13,000 at the end of 2007 to about 8,700 at the end of 2008. one of the Chapter 11 petitions says.

Stock has shed roughly 161 locations--100 of them since August 2008. Now it has roughly 200, and it's likely that more will be closed. On a Frequently Asked Questions page for Stock customers, the company states: "Stock senior management has presented The Gores Group with a financial plan which requires us to take the hard actions this housing downturn dictates. We will be exiting or reducing capacity in some markets. In the coming days and weeks, we will be determining the best way to exit these locations, which may involve either a sale or orderly wind down of the operations. We are in the process of communicating this to our effected locations and associates and are not sharing any other information at this time. We will release more information after the process is complete."

While Stock wasn't the only part of Wolseley's global operations to have troubles, its difficulties were a big burden on the company because Wolseley gets 10% of its revenue worlwide from Stock alone. Stock's losses, compounded by troubles later in other parts of the world, put Wolseley in potential violation of its lending covenants.

As a result, the company announced March 6 that it is seeking a joint-venture partner in Stock, and that if it didn't find such an investor by Aug. 1 it will exit the company.

The Gores Group describes itself on its website as a private equity firm "focused on acquiring controlling interests in mature and growing businesses which can benefit from the firm's operating experience and flexible capital." It has offices in Los Angeles; Boulder, Colo.; and London.

Since its founding in 1987, Gores has acquired 60 companies worldwide. Among those investments was Seimens Enterprise Communications, a unit of Siemens; Westwood One, the radio conglomerate; Sagem Communications, a broadband communications supplier; and Vincotech, a French company involved in global positioning system technologies. The timeline of Gores acquisitions doesn't reveal any residential construction-related companies acquired in this decade; Gores' self-description calls it an investor primarily in the technology, telecommunications, business services and industrial sectors.

"We are enthusiastic to partner with Wolseley and the Stock management team on this transaction," Alec Gores, founder and chairman of The Gores Group, said in a statment. "We believe that given Stock's leadership in the marketplace, it is well positioned to benefit from a recovery in the sector. Wolseley has already taken aggressive actions to mitigate the effects of the U.S. housing downturn on the Stock business by continuing to diversify its exposure to new residential construction and streamline its operations. We believe the steps already taken by Wolseley in tandem with Gores' focus and operational expertise, will position Stock well to continue to provide high quality products and service to its customers and to return to profitability when the economy improves."

Builders Merchant Journal, a U.K.-based trade journal noted that Wolseley's next statement will include a pre-tax exceptional loss of 175 million pounds ($262 milllion) as a result of the deal. In addition, Wolseley's statement noted that the Stock deal excludes Stock's construction lending division, which employees 54 people and was being wound down. As of last July 31, it had $391 million worth of loans outstanding.

"The group intends to continue to operate the business but to effect a phased reduction in the portfolio over the next two to three years," Wolseley said. "It expects to continue to undertake selective lending to allow for an orderly reduction in the scope of the business. The portfolio will also be reduced through a phased withdrawal from selected markets to position the business for a possible future sale. Consequently, the majority of the construction loan management team will be retained."