Wolseley Plc revealed today that it is in the process of identifying a joint venture partner for Stock Building Supply, the second-largest U.S. pro dealer, or else will exit the business by Aug. 1. "A number" of unnamed companies are interested in acquiring all or part of Stock, the U.K.-based company said in a statement issued by Stock.
In a report released this morning, Wolseley said the decline in housing starts, coupled with a continued fall in lumber prices, have expedited the company's decision to pursue a sale or joint venture, or to dispose or exit Stock Building Supply, by Aug. 1. Wolseley also announced that it will try to raise 1 billion pounds ($1.42 billion) in a rights issue to help it avoid breaking banking covenants. Wolseley is said to have debts totaling 3 billion pounds.
"We are working very closely with Wolseley to identify potential partners that can help Stock Building Supply grow when the market recovers," Stock Building Supply President Joe Appelmann said in a separate statement. "Our business model has fundamental differences from the remainder of Wolseley's portfolio, and in these economic times it makes sense to explore other options."
Stock provides 10% of Wolseley's worldwide revenue. 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. That compares with an $81 million loss in the first half of the previous fiscal year. Stock said a 15.9% drop in like-for-like sales volumes, caused in part by a drop in lumber prices, contributed to the overall sales slump. It also noted that new housing, which accounted for 68% of Stock's business in the first half, is in a slump, with housing starts having fallen 41% from the previous year.
Raleigh, N.C.-based Stock in its fiscal first half has closed 83 branches and slashed headcount by 4,330. Stock now has only about half the employees it had 18 months ago. In July 208 it had 285 locations; now it has 202. (See map.) In addition, three distribution centers have been closed.
"We have worked diligently to position the business so that it will be ready to take best advantage of the upturn--which we know will come," said Appelmann in his statement, which was released to the public. "We continue to operate in the highly cyclical sector of new residential construction in the U.S., but we remain committed to this market. It's a part of who we are; it's in our DNA."
In an internal memo to Stock staffers, Appelmann said Wolsleley "has been approached by a number of parties to acquire all or part of the Stock business. Over the next few weeks, Stock's senior management team will be meeting with potential buyers. ... Although this kind of announcement can be unsettling, we must move forward and maintain our focus on the CUSTOMER. Our emphasis on sales management and accountability does not change. Our responsibility to the second half financial budget does not change. Our focus on margin improvement, expense control and cash generation does not change. We must remain focused on our goals and continue to run the business as usual."
Stock Building Supply, formerly Carolina Holdings, was formed in 1986 by Wolseley's purchase of Carolina Builders. In 2006 the company announced sales of $5.3 billion at the height of the housing boom. Stock ranked second on the 2008 ProSales 100 list of the nation's largest LBM operations, with sales in 2007 totaling $4.7 billion, 94% of them to professional builders.
Since then, however, its business has suffered as the housing market--particularly the market for the biggest builders--began to suffer. A decline in the dollar's value against the British pound (the currency Wolseley uses in its financial reports) made Stock's earnings look even worse. Then the worldwide recession caused Wolseley's operations elsewhere to stumble. By early this year, things had reached the point where Goldman Sachs opined that, unless banks ease their lending covenants, Wolseley would need to close Stock if it hopes to survive.
"We are confident that we can conclude a deal in the best interests of Stock Building Supply and Wolseley's shareholders," said Chip Hornsby, Group Chief Executive for Wolseley. "Indeed, our preference is to structure a deal that enables our associates and shareholders to benefit in the long-term potential of the business, such as a joint venture."