Beacon Roofing Supply announced today it will acquire Allied Building Products from Ireland's CRH plc, thus uniting the third- and seventh-biggest ProSales 100 dealers.
The $2.62 billion cash payment for Allied--to be financed by $2.2 billion worth of borrowings from an expanded revolving credit facility--will create a behemoth with 593 locations and 8,500 employees across North America, taking in about $7 billion in annual revenue. Once the deal is consummated around Jan. 2, the Beacon-Allied combination would rank behind only ABC Supply on the PS100 list and would be America's biggest publicly traded dealer.
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 a news release. "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.
Beacon estimates it paid a multiple of 8.7x to buy Allied. It bases this on Allied's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) for 2017 plus the assumption it will reap roughly $110 million in annual run-rate synergies that it expects to reap within two years of closing the deal.
However, Jason Fraler, a managing partner at Anchor Peabody, says that if you ignore the run-rate synergies and look only at the company's adjusted EBITDA of $193 million and the purchase price of $2.6 billion, the price paid is 13.5 times earnings.
"So, the right question is really--is 13.5x about right for this deal?" he 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. And 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."
Today's news continues two recent trends: Furious mergers and acquisition activity by specialty dealers and the trend by roofing companies to expand into sales of drywall and interior products. One of the most recent examples of that was ABC Supply's acquisition last year of L&W Supply, the distribution arm of USG.
Indeed, Beacon's news release said: "The combination will provide Beacon with entry into the adjacent interior business, including wallboard and suspended ceiling products, and will strengthen the combined company's competitive positioning through extended offerings. The interior category shares many attractive investment qualities and characteristics with the roofing products distribution business."
The deal will be of greater interest 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.
Acquisitions over the past year by the No. 3 ProSales 100 company helped boost total sales, as same-store revenue increased just 2.2%. Gross margins held steady at 24.5%, while net income as a percentage of sales rose to 3.7% in the April-to-June period from 3.5% a year earlier.
Allied's financial statements always have been murkier, as they were wrapped into CRH's overall numbers and converted into Euros. But in a presentation to analysts today, 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.
Beacon estimates that, once merged, residential roofing will deliver 44% of sales, non-residential roofing 27%, complementary products 14%, and interior products the final 15%.
Beacon noted it has acquired and integrated 43 companies since its initial public offering in 2004. The biggest of them was Roofing Supply Group, which it took over last year. Fraler predicted Beacon will slow its acquisition pace next year as it takes time to digest Allied.
"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 for specialty manufacturing companies."
