James Hardie’s shareholders have punished the $20bn building materials group for buying rival Azek for $14bn in what market experts are describing as an overpriced acquisition.
The cash and scrip deal was at a 37.4 per cent premium to Azek’s last closing share price of $US41.39 (representing a market value of $US5.9bn).
It comes as investors lose patience with Australian listed companies after a number embarked on transformational deals recently only to see their performance to go backwards.
Acquisitions by Ampol, Reece, Perenti, Orora and Viva Energy are among the latest examples.
Shares closed down 14.5 per cent, as the deal gave the market flashbacks to the unsuccessful move by rival Boral in the US market with its $3.5bn Headwaters acquisition.
Analysts say the price equates to 40 times Azek’s net profit, or 21.5 times its earnings before interest, tax, depreciation and amortisation, while factoring in debt.
The earnings accretion in the first year is reliant on over $US350m of synergies.
Some consider James Hardie among the best in its class, and it trades at more than 20 times its net profit.
But analysts say the company it is buying has too much debt and question the need for a deal as James Hardie – known for its discipline over the years – continues to kick goals.
The goal may be to gain a primary US listing. The deal sees Australia become its secondary trading market, with James Hardie already generating about 74 per cent from the US.
James Hardie has tapped Jefferies and Bank of America for the $US8.75bn offer ($13.95bn), which rivals CSL’s $16.4bn play for Vifor Pharma in 2022, while Azek has Goldman Sachs on its side.
A transformational cash and scrip deal was tipped to be on the agenda for the cashed up James Hardie last year, with Azek named as a possible target by analysts after James Hardie delayed its share buyback.
Chicago-based Azek makes environmentally sustainable outdoor living products, such as decking, rail and accessories under brands such as TimberTech.
James Hardie boss Aaron Erter used to work forAzek chairman Gary Hendrickson, with both previously executives at Sherwin Williams and Valspar, and the two companies have offices close by in Chicago.
James Hardie generates about $US1.1bn of annual EBITDA whereas Azek generates about $US390m. The hope is for the deal to boost James Hardie’s revenue growth through entering a new market. The target’s sales are growing at 15 per cent annually on average.
The $US8.75bn bid, which includes $US386m of net debt, comes after a wave of mergers and acquisitions in the Australian listed building materials space in the past 18 months as major global groups bet on earnings upside in the sector linked to housing shortages.
There are expectations the market has bottomed, with interest rate cuts expected, but some investors aren’t so sure the worst is over in the US economy.
Under the terms of the agreement, Azek shareholders will receive $US26.45 in cash and 1.0340 shares of James Hardie for each Azek share they own.
The offer equates to $US56.88 per share, based on the closing stock price of $46.80 per share of James Hardie’s Australian-traded CHESS Depositary Interests on March 21.
James Hardie and Azek shareholders are expected to own about 74 per cent and 26 per cent, respectively, of the combined company.
The companies said in a joint statement the products of the two groups were highly complementary and the deal would increase James Hardie’s adjusted EBITDA by 3 per cent over five years.
James Hardie plans a share buyback of up to $US500m over the next 12 months. Net debt will be 2.8 times EBITDA, and James Hardie is targeting a rate below 2 times. James Hardie’s last big deal was Fermacell in Europe in 2017 for €516.4m under former boss Louis Gries.
The latest deal follows SGH’s acquisition of Australia’s largest building materials provider Boral, Saint Gorbain’s purchase of CSR and AdBri being purchased by Irish building materials giant CRH.
James Hardie shares were down more than 15 per cent to $39.75 later Monday.
The companies said in a joint statement the products of the two groups were highly complementary and the deal would increase James Hardie’s adjusted EBITDA by 3 per cent over five years.
James Hardie plans a share buyback of up to $US500m over the next 12 months. Net debt will be 2.8 times EBITDA, and James Hardie is targeting a rate below 2 times. James Hardie’s last big deal was Fermacell in Europe in 2017 for €516.4m under former boss Louis Gries.
The latest deal follows SGH’s acquisition of Australia’s largest building materials provider Boral, Saint Gorbain’s purchase of CSR and AdBri being purchased by Irish building materials giant CRH.
More Coverage
Add your comment to this story
Gold Road’s investors up pressure for it to engage with suitor
Investors in Gold Road Resources are understood to have asked its management to engage with its mining partner and takeover suitor, Gold Fields.
Virgin’s non-deal IPO roadshow launches on Monday
The first meetings with potential investors for an initial public offering of Virgin Australia begin early next week.
To join the conversation, please log in. Don't have an account? Register
Join the conversation, you are commenting as Logout