A STOCK I have recently discussed, Boral Ltd, has entered into a binding agreement to acquire US listed Headwaters Incorporated for US$24.25 per share in cash
The cash offer represents an aggregate enterprise value of about US$2.6 billion or $3.5b in Australian dollars.
Headwaters (HW) is a leading manufacturer of building products and one of the largest marketers of fly ash in the US. Fly ash is a product which significantly improves concrete performance in different ways and also provides many benefits in cement and non-cement applications. The company is split into two main divisions in building products (65pc of the business) and construction materials (34pc of the business, but mainly fly ash).
The company owns 34 building products operating locations, 68 fly ash sources and 25 fly ash terminals. By revenue, the company is largely exposed to the US housing market (majority) and some infrastructure. In addition, HW has an extensive and established national distribution network across the US (e.g. access to Home Depot and Lowe’s stores which will help to distribute Boral’s existing products range). HW has an enterprise value of US$2.4B and the company’s stock price has outperformed the S&P500 index especially over the last two years.
Boral (BLD) has stated previously that its intention was to look for bolt-on acquisition to grow the company. Although this is a significant acquisition, the chief executive of BLD Mike Kane has positioned this acquisition as a number of bolt-ons in one transaction given HW different divisions. For BLD the acquisition of HW accelerates their footprint into the key US market and given the size, we believe this is transformational in nature.
The investment is a strong strategic fit and it will allow BLD to increase scale in fly ash – this is seen as a key growth driver and plays favourably into the infrastructure spend underway in the US and it accelerates development of BLD’s light building products platforms and further distribution channels.
The new BLD will now be less exposed to the Australian economy where some of the concerns centred on the residential construction and slowdown in the housing market. This acquisition will largely shift the revenue mix away from Australia from about 67pc down to about 51pc and increasing the US exposure from about 19pc to about 38pc, with the remainder coming from USG Boral plasterboard JV in Australia and Asia. Although the acquisition plays into the long-term growth prospects of the US economy this acquisition is not without risk and so far has generally been met with lacklustre broker responses.
To help fund the acquisition, BLD will under-take an equity raising to raise about A$2,058m of new equity through a fully under-written placement to institutional investors, at $4.80 per new security to raise $450m; and a fully under-written, 1 for 2.22 pro-rata accelerated renounceable entitlement (rights are traded on the ASX) at an offer price of $4.80 per new security to raise $1.6b. The balance will be funded through a combination of US$0.8b of debt and a committed bridging acquisition facility and cash.
I originally favoured BLD to leverage into US housing and to take advantage where the housing market is coming off a low base – on that count this strategy makes sense – although the size of the acquisition is a surprise. I view this investment by BLD as a very good medium to long-term growth driver for the company, but shorter term dynamics may weigh on the stock price and could see the share price trade lower given the issuance size, management distractions, the price paid for the acquisition, integration risk and increasing debt levels.
- Christopher Hindmarsh is an adviser at JBWere Limited. JBWere Limited is owned by National Australia Bank Limited Group. This article does not take into account the investment objectives, financial situation or particular needs of any particular person. Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser.