Read between the lines in Beacon Roofing Supply's plans to acquire Allied Building Products and you'll find details that could affect you and your business. The $2.62 billion cash payment for Allied unites the third- and seventh-biggest ProSales 100 dealers to create a behemoth with nearly 600 locations, 8,500 employees and annual revenue around $7 billion.
We asked several analysts to analyze the deal announced Aug. 24, from Ireland's CRH plc. Here are highlights of what they said.
If You Care About How Much You Can Get on a Sale ...
The analysts questioned Beacon's line that it paid a multiple of 8.7x to buy Allied. That's because multiples typicall are based on dividing the purchase price by EBITDA (earnings before interest, taxes, depreciation, and amortization) or similar variation that strips out nonrecurring costs. But along with Allied's adjusted EBITDA, Beacon's multiple also counts roughly $110 million in annual run-rate synergies that it expects to reap within two years of closing the deal. Remove that $110 million and the multiple jumps to 13.5x.
"So, the right question is really--is 13.5x about right for this deal?" Jason Fraler, managing partner at Anchor Peabody, asked rhetorically. In his answer, he noted that Beacon shares currently trade in the mid-teens when you divide the company's enterprise value over the past 12 months by its EBITDA. "Given private companies are usually discounted from where the public companies trade (due to a lack of liquidity for their shares)--this suggests a premium paid to the shareholders of Allied," Fraler wrote in an email to PROSALES. "If we owned any shares of Allied and taken at face value, we’d be happy about this."
If You Wonder Whether You Can Find Buyers ...
"I see the proposed transaction as another indication of the value that major strategic players and the financial community, including banks and private equity, see in the building products distribution business," said Paul Hylbert, chairman of Kodiak Building Partners and the CEO of ProBuild when it grew most rapidly.
Michael Collins, a partner at Building Industry Advisors and author of PROSALES' "Big Deals" column, noted that the investment firm of Clayton, Dubilier & Rice is making "a $500 million second bite at the apple bet on roofing." The first bite came when Clayton sold Roofing Supply Group to Beacon in October 2015.
"That could have been interpreted as indicating Clayton's belief that the building products industry was closer to a peak than not," Collins said. "Now, two full years later and further into the cycle, we've got smart money like Clayton investing."
On the other hand, if you had been thinking about selling to Beacon or its No. 1 rival, ABC Supply, then think again. "We would expect this to have an adverse effect on those specialty dealers who might want to sell their business in the future," Fraler said. "A question we’ll probably hear, when we put a deal in front of ABC or Beacon, will be: 'Why do I need to overpay for a market which I’m already in?' There will be outliers to this of course, and perhaps lumberyards getting into specialty helps, but generally we can’t see how those specialty groups who have waited to trade their businesses generally benefit from this unless there is a hole in the map they fill for one of the large buyers.
"We would surmise that Beacon will probably slow down on buying businesses to allow their balance sheet to de-leverage, and integrate Allied," Fraler added. "Much like the LBM space over the past year or so, this might not be a perfect time to take your business to market as the big firms have their attention focused on their respective merger/buyouts.
About those Synergy Savings...
"While there will no doubt be synergies, $110 million is an aggressive number," Hylbert said.
"I don't think synergies are ever really guaranteed," said Paul Bumblauskas, a management and financial expert who serves as a consultant to LBM dealers and their roundtables. " I would not use them to reduce the theoretical multiple paid."
Without factoring in the synergies, the resulting 13.7x multiple "would be far too high" a price to pay, Collins said, even for a company as big as Allied.
"The other way to look at this, though, is that Allied was able to get Beacon to effectively pay them for some of the 'significant run rate synergies' that they identified in the deal," he says. "Typically, when you're representing a company for sale, you point out any and all operating synergies that you know will accrue to the buyer as the result of the transaction. However, the buyer is always quick to point out that it will not pay a multiple on any of those synergies that the buyer brings itself brings to the table. An abundance of such synergies may cause a buyer to increase their multiple, the thinking behind which would be somewhat opaque to the seller. The same is true in this situation.
"It is more likely that Beacon paid for the portion of the synergies that Allied primarily brought to the table, while not paying for synergies that Beacon itself brought to the table," Collins speculated. "In other words, some of the $110 million in EBITDA probably had a multiple applied against it and some didn't. Thus, the true, effective EBITDA multiple is a number between 8.7X and 13.7X that is only known to the deal team and senior management at Beacon based on how they viewed the situation."
If You Own Shares in Beacon ...
"Frankly, given the geographic diversification and key markets Beacon picked up, plus entering into the adjacency of drywall/acoustics, and all of the potential synergies which helped bring the effective multiple/price down, this deal appears to makes sense for Beacon," Fraler wrote.
"The overlapping markets are a challenge, but not as serious as I would have initially thought," Bumblauskas said. "Their category mixes differ to some degree, so this is an opportunity.
If You Are a Manufacturer...
"Roofing, siding, drywall, acoustical ceiling, and related product manufacturers woke up this morning with even more concerns about customer concentration, which isn’t comfortable," Fraler wrote. "Bottom line, the magnitude of ABC, Beacon, Builders FirstSource, US LBM, et. al. in the specialty market is an opportunity and a risk for specialty manufacturing companies."
Rebates are one reason why. "[They] play such a large role in the specialty world, where large groups get significantly more on a percentage basis than smaller groups, [that] we continue to feel the size disparity has now given the largest companies too much of a differential advantage for independent dealers to overcome," Fraler said. "In general. In one particular year, a couple of percentage points doesn’t make a big difference. Over the course of 10 to 15 years, this will have a huge impact, as larger companies use this extra profitability to reinvest in their business and create competitive advantages."
If You Compete With Beacon--or Even if You Think You Don't ...
You might think all a sale of one specialty dealer to another might not affect you, but Fraler believes Beacon deal is likely to aggravate worries that roofing manufacturers already have been feeling as the distribution channel consolidates. "Some major roofing manufacturers have been spending more time courting the lumberyard community," Fraler said. "[This] begs the question--why? For years, lumberyards have been somewhat ignored as manufacturers focused on specialists. But now, with all of the consolidation in the lumber space and the diversification of product lines in addition to lumber, manufacturers need to sell to the lumberyard segment."
East Rutherford, N.J.-based Allied has 208 locations in 31 states, while Beacon has approximately 385 locations in 48 U.S. states and six Canadian provinces. Both sell such exterior products as roofing, siding, windows, and doors, while Allied also is known for selling wallboard and acoustical ceiling tile.
"The expanded geographic footprint will allow Beacon to enter new local markets, particularly in New York, New Jersey and the upper Midwest," Herndon, Va.-based Beacon said in its news release announcing the deal. "In addition, acquiring Allied allows Beacon to further strengthen the company's position as a leader in roofing products distribution, while accelerating growth in other key product categories, including siding, windows, doors, decking, trim, waterproofing, insulation and solar.
The merger means Beacon will operate in all 50 states and enjoy enhanced presence in several key ones, including Texas, Florida, and California.
The deal will be of greater interest to dealers that cater to repair and remodel (R&R) firms than to new-home builders, as R&R is expected to provide more than 70% of the merged companies' revenues.
Beacon took in $4.13 billion in revenue last year. On Aug. 2, it reported that net profit rose 8.8% in its fiscal third quarter ended June 30, climbing to $44.7 million from a year-earlier $41.1 million on a 5.3% sales gain to $1.21 billion.
If You Want to Buy an LBM Operation...
"For buyers of businesses, this is a good, illustrative lesson on how to lower the multiple you are being asked to pay," Fraler said. "There are often many ways a combined business can benefit economically, and this should be factored into a buyer’s thought process on valuation. As a buyer, you rightfully won’t always share these cost savings with the seller, but this analysis is something executives and owners should be armed with internally as they answer to their stakeholders/themselves."
"As an independent dealer, you now hope one of the huge competitors doesn’t come to your market, drop prices, overpay to steal your salespeople, offset losses in your market with a market they are profitable in, or use their sway with manufacturers to take away key brands you’ve built your business around," he added. "Hope isn’t a strategy. For most, it’s get bigger or go home time, in our opinion. A lot of independents understand this concept, so a trend I would argue we will see is independents more active on the M&A front, obviously as sellers but more notably as buyers."
If You Care About How Transactions Get Financed...
Collins noticed that Clayton, Dublier & Rice is helping finance the deal by utilizing a convertible preferred stock security. "Such preferred stock typically only produces returns that would be of interest to a [private equity] fund when the convertibility of the security into common stock becomes 'deep in the money,' meaning that the conversion to equity makes strong economic sense," he said. "Otherwise, the preferred would bear a coupon rate of interest (whether paid in cash or paid in additional shares of the same preferred) that would yield more than traditional corporate bonds but would not, alone, meet the return hurdle of a PE fund. Structuring the deal with preferred stock also helps Beacon in its compliance with debt covenants, since the preferred stock is not treated as debt in such calculations. When the banks look at preferred, they see equity."
"This deal highlights advantages of being a much larger organization," Fraler said. "This deal was financed with high-yield bonds, and another $400 million to $500 million of fresh equity from a private equity firm. Middle-market businesses--those with $25 million to $500 million in sales--in most cases can’t access this kind of financing."
If You Are Viewing This From Ireland ...
That is, if you are CRH plc, the Dublin-based multinational building products and distribution firm that used to own Allied, you see this as a way to shed a company that was treading water.
Beacon said Allied has taken in $2.58 billion in revenue over the 12 months ended June 30. Given that its revenues for all of calendar year 2016 were $2.56 billion, this indicates the company has largely been treading water in 2017. The company's adjusted EBITDA--which Beacon's presentation didn't define--rose to $193 million (7.5% of revenues) for the 12 months ended June 30 from $187 million (7.3%) in calendar 2016.
CRH took note of those tepid numbers in its announcement of the deal. "While the business has delivered significant improvement in performance and returns in recent years, the absence of value-accretive acquisition opportunities and a lack of visibility as regards a route to market leadership, has resulted in CRH's decision to divest this business now at an attractive valuation," the Dublin-based company said.
