The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Antony Currie
MELBOURNE, March 24 (Reuters Breakingviews) - Always be careful when you bring in the builders. Shareholders in $12 billion ASX- and NYSE-listed James Hardie Industries JHX.AX appear to be taking such advice to heart. On Monday morning they wiped as much as 14% off the Sydney-traded shares of the fibre cement cladding maker, hours after it unveiled an almost $9 billion agreed deal to buy Chicago-based deck and railings manufacturer Azek AZEK.N. On paper, the two complement each other well. But the financial details of the job leave some unsightly holes.
Start with the cost cuts, which James Hardie boss Aaron Erter puts at $125 million a year. These would currently be worth almost $1 billion after being taxed at the U.S. corporate rate of 21% and then capitalised. The value of these savings falls far short of the 41% premium, or $2.4 billion, he's paying based on Friday's closing share price of both companies. James Hardie shareholders would own three-quarters of the new entity once the cash-and-stock deal closes.
It leaves the heavy lifting to the additional revenue an enlarged company could generate. There should be some uplift: Erter and his counterpart Jesse Singh point out that more than half of homeowners get their decking and siding work done together. But they're pegging the benefit as an almost 10% boost to their combined top line and a 45% EBITDA margin, compared with the sub-30% performance on that measure of profitability each currently manages.
That sounds punchy, even without trying to reckon with the effects of the global trade war U.S. President Donald Trump is unleashing and how that might weigh on how much homeowners want to spruce up properties. The topic was curiously absent from the companies' call outlining the deal, though Singh did say that most of Azek's products are made in America.
U.S. inflation expectations are already rising and consumer spending slowing, while Trump and his cabinet members refuse to rule out a recession. A downturn would impact both companies' sales - even James Hardie, despite its Australia listing, relies on the U.S. and Canada for 80% of its core earnings. Perhaps Erter and Singh's optimism on the benefits of combining will prove correct. At present, though, their deal is creating a bit of a draft.
Follow @AntonyMCurrie on X
CONTEXT NEWS
Shares in Australian- and NYSE-listed building materials company James Hardie Industries fell as much as 14% on March 24 after it said it has agreed to buy smaller U.S. rival Azek in a cash-and-stock deal that values the target at $8.75 billion. At $56.88 per share, the offer represents a 41% premium, based on the closing stock price of both companies' stocks on March 21.
James Hardie, Azek shares have shed post-US election bump https://www.reuters.com/graphics/BRV-BRV/movaywmydva/chart.png
(Editing by Una Galani, Ujjaini Dutta and Aditya Srivastav)
((For previous columns by the author, Reuters customers can click on CURRIE/antony.currie@thomsonreuters.com))
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.