Private equity ‘interest’ in building products company James Hardie

In the six months to December 30 James Hardie generated $US309.5m in net profit.

Here’s something investors in the building materials industry thought they would never hear – James Hardie may have a suitor.

There’s chatter in the market that a private equity firm has been buying into the stock with a holding beneath 5 per cent.

The company has always been considered off limits as a takeover target because of its asbestos liabilities paid out as compensation to victims from exposure to its former products through its Asbestos Injuries Compensation Fund.

But as the liabilities reduce over time, the company becomes less defensive and easier to work around for a buyer.

On the face of it, James Hardie may look expensive. But it ticks a lot of boxes for a US-based buyout fund basing its investment choices on global thematics.

Private equity firms worldwide are looking at ways to capitalise on the lack of affordable housing stock and seeing the area as a lucrative future trend, with many buying into build-to-rent and land lease communities with modular housing.

The trends are similar in the US to Australia in that unemployment is low, immigration is up and there’s not enough housing being built to meet demand.

James Hardie also makes products used on the side of housing that makes the cost of construction more affordable.

Then there’s James Hardie’s performance – it has recently been shooting the lights out when it comes to its profit margins.

For the six months to September 30, James Hardie, which has been buying back stock, generated $US309.5m in net profit, down 6 per cent on the previous corresponding period with record first half operating cash flow of $US459.1m, up 74 per cent. Sales in Europe and Asia Pacific increased in the quarter.

Yet some still remain sceptical, not just for the asbestos being a poison pill, but with a market value of $21bn, it’s expensive.

It comes as any sale of the remainder of Perth-based building materials company BGC appears to be on the go slow.

The group recently offloaded the plasterboard and fibre cement business to Etex, which comprises 10 to 20 per cent of the operation.

But cross guarantees on the home building part of the BGC business had deterred buyers, which would need to take on home builders’ insurance to deal with the risk.

A deal was to be more palatable as the home building arm was built out.

However, it now faces legal action from Brickworks, which is claiming that it is in breach of the Trade Practices Act by selling bricks at below market following its Midland Brick acquisition.

The acquisition was cleared by the ACCC but gives BGC 80 per cent of the market.

One possibility is that BGC offloads its cement operations separately – thought to be the jewel in the crown – although costly tax leakage from a break-up of the company could be a deterrent for a sale.