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When a company announces a big acquisition, a share price fall of more than 15 per cent rather suggests it is based on shaky foundations. That’s the situation Dublin-headquartered, Chicago-based and Australia-listed building materials provider James Hardie Industries finds itself in, following its $8.75bn cash-and-shares deal for US decking maker Azek.
In part, that’s because James Hardie is offering its target the best room in the house. Under the proposed deal, Azek shareholders get $3.8bn of cash, plus 26 per cent of a combined group that will be worth $15.8bn, taking their combined pre-deal market capitalisations and adding the present value of proposed cost savings, after tax.
That package is equivalent to a premium of more than 30 per cent to where Azek was trading before the deal was announced. James Hardie investors, meanwhile, have been downsized. Their share in the combined entity means they are, on paper, 8 per cent worse off than they were before they started. Making up that shortfall will require them to boost revenue, which they expect to do, but is harder to predict.
US building supplies are proving a rare bright spot in an otherwise gloomy time for dealmaking, with M&A value languishing at a 10-year low. Last week, the distributor Beacon Roofing Supply succumbed to an $11bn offer from billionaire Brad Jacobs. James Hardie is, via Azek, adding outdoor living products to its own focus on house exteriors. Homeowners keen to spruce up an ageing property might well want somewhere to sit from which they can admire their new siding.
But there’s also a point where combining for growth looks like huddling together to stay warm. High mortgage rates are continuing to weigh on the US housing market. These encourage borrowers with standard US -style fixed-rate deals to stay put for fear of increased loan costs. Despite the Federal Reserve’s percentage point of rate cuts since September, 30-year fixed mortgage rates, at 6.7 per cent last week, are still historically high.
Stubborn inflation has reduced expectations of further monetary easing this year while weaker economic growth doesn’t encourage pricey home upgrades. Homebuilders, which began the year on an optimistic note, are now underperforming the broader stock market as hopes fade for a pick-up in activity any time soon.
Azek shares jumped as much as 20 per cent on the deal. But by the end of Monday, the combined companies were worth less than they had been at Friday’s close. It shouldn’t be surprising if an outsize bid in an uncertain economy encounters some issues with subsidence.
jennifer.hughes@ft.com
