Boral Limited (BLD) – market cap as of 26/11/2016: A$3.79bn
Headwaters Inc. (HW) – market cap as of 26/11/2016: $1.77bn
Introduction
On November 20, 2016, Boral announced the acquisition of Headwaters, a Utah-based stone veneer manufacturer, for $24.25 per share. Boral will pay $1.8bn in cash, for a total EV of $2.6bn. This way, Australia’s largest supplier of building material will double its presence in the United States, where Donald Trump has foreseen a great jump in investments in infrastructure and real estate.
About Boral
Boral is Australia’s first producer of building and construction materials. The company was founded in 1946 and has significant presence in the United States and Asia. The products Boral deals with include ash, asphalt, brick, concrete, cement etc. Its building solutions division offers different services from infrastructure to commercial solutions mainly operating with office blocks, towers, industrial, retail and entertainment complexes. The acquisition of Headwaters represents a critical starting point for the company’s expansion plans.
In 2015, Boral reported sales for A$4.3bn and EBIT for A$352m (a 103% increase compared to 2014). The company’s EBITDA is at A$610m (a 38.6% increase with respect to the previous year of operations). The company has also shown a positive trend in dividend payment given its A$6.1 EPS. This is noteworthy given that very few companies in the building and construction materials industry pay a dividend.
About Headwaters
Headwaters is an American manufacturer in the construction and materials industry. The company was founded in 1987 and is headquartered in South Jordan, Utah. Headwaters mainly operates through three lines of business: (i) building products – selling products to distributors, contractors and other users; (ii) construction materials – producing coal combustion products (CCP) for ready-mix concrete firms; (iii) energy technology – selling catalysts to oil refineries. The company aims at improving lives through technological advancements in construction materials. For this reason, it has established a robust infrastructure and logistics network throughout the US.
In 2015, Headwaters’ sales reached $895m (a 13.1% increase compared to 2014) and its EBIT $102m (a 53.3% increase with respect to last year). Its EBITDA increased 11% to $54m and its EBITDA margin expanded by 50 basis points.
Industry overview
The building and construction materials industry is headed to a bright period – or at least brighter than it has been so far.
In the US, growth is imminent, with roads and bridges in desperate need of repair, as well as airports and seaports becoming obsolete. Investments made in US infrastructure projects in the mid-twentieth century are now reaching the end of their useful lives. Indeed, estimates to address the infrastructure deficiencies run as high as $2.3 trillion needed over the next decade. Moreover, President-elect Donald Trump is likely to kick-start this awaited increase in infrastructure spending with his “America’s Infrastructure First” policy. Indeed, he vowed to allocate $1 trillion to rebuild bridges, hospitals and all those infrastructures that are cornerstones of modern societies. Although he might have been too optimistic, most analysts agree that he will, at least partially, deliver on his promises, boosting growth within the sector.
Outside of the United States, China is the major player to look at. Even though the Asian giant is moving from an investment-led economy to a consumption based one, its public spending on infrastructures is greater than the ones of Europe and North America combined. In Europe, instead, a feeble growth of the economy could finally encourage much needed investments from the private sectors, especially if supported by fiscal policies. This will further benefit the construction industry.
Deal Structure
On November 20, 2016, Boral agreed to acquire US building material company Headwaters for $1.8bn in cash, in a deal with total EV of $2.6bn. The transaction is Boral’s largest so far, accounting for 64% of the company’s pre-deal EV.
The offer of $24.25 per share, represents a 21% premium over Headwaters’ closing price on November 18, and a 34% premium over the target’s 30-day volume-weighted average.
The deal will be financed with a mix of debt (A$835m), cash (A$485m) and equity. Indeed, Boral plans to issue A$2.05bn (US$1.5bn) new shares at A$4.80 each, a 22% discount to the price before announcement.
The deal, which is expected to close in mid-2017, sees Boreal paying 10.6x Headwaters’ EBITDA. The combined entity will have a net debt to equity ratio of 2.5x, a very high ratio for a company with cyclical earnings.
In order to compensate the high premium offered, Boral expects the transaction to be immediately low-double-digit accretive and realise $100m of cost saving per annum within 4 years, bringing the acquisition EV/EBITDA multiple down to 7.5x.
Deal Rationale
According to the management teams of the two companies, the transaction is expected to deliver significant value to shareholders. Indeed, the two businesses are believed to be highly complementary and a strong commercial rationale supports the combination.
Boral has an existing presence in North America, with strong positions in bricks, concrete and clay roof tiles, manufactured stone and fly ash. Headwater, on the other hand, sells a variety of plastic building materials. The acquisition should therefore bolster Boral’s light building product portfolio, positioning the firm to deliver sustainable growth in the US housing market, which is experiencing positive momentum with housing construction climbing to a nine-year high in October.
Finally, the combined entity would become the largest US supplier of fly ash, a key ingredient in concrete. The new firm will then me better positioned to take advantage of Donald Trump’s promised infrastructure spending.
Market Reaction
Following the announcement, as investors factored in the effect of a new equity issuance (at a 22% discount), Boral’s stock price plunged by 12% to A$5.09. As of November 26, the share price is pretty much unchanged (A$5.10) and still higher than the A$4.80 issue price of the new shares, signalling investors’ confidence in the transaction. The favourable view on the deal is also confirmed by the fact that the institutional component of the capital issuance was highly oversubscribed.
Financial Advisers
Deutsche Bank is acting as the financial advisor to Headwaters, whereas Boral is being advised by Citigroup Inc. and Macquarie Capital.
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