Wolseley Plc announced today it will sell 51% of Stock Building Supply, America's No. 2 LBM operation, to an affiliate of The Gores Group of Los Angeles. As part of the new joint venture agreement, Stock will file for protection from creditors under Chapter 11 of the federal bankruptcy code, but it promises to pay all its debts.
What is The Gores Group? Apparently, it's a newcomer to the residential construction supply world. See related story.
"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."
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.
"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," the 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. 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. The Gores Group will control NewCo and Wolseley will have 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. In July 2008 it had 285 locations; now it has roughly 200. In addition, four distribution centers have been closed.
Largely because of those losses, Wolseley--which gets 10% of its revenue worlwide from Stock alone--began to run into trouble meeting 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 reported 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."