Shares of Boral Limited (ASX: BLD) have been crushed today. After emerging from a trading halt this morning, the shares have plummeted 17.7% to $5.06 after hitting a low of $4.95 earlier.
So What: The fall came after Boral announced the acquisition of the United States-based Headwaters Inc for a sum of US$2.6 billion, or A$3.5 billion.
Headwaters is a leading manufacturer of building products and construction materials and will help to bolster Boral's existing operations in areas such as roofing, stone and fly ash.
In the 2016 financial year, Boral generated more than three-quarters of its revenue in Australia with the remainder coming from the United States. According to its recent presentation its Australian revenue would fall to around 53%, with 38% coming from the United States and 9% from 'Other'.
Boral also estimated it could generate roughly US$100 million in synergies per annum within four years due to the highly complementary nature of the businesses.
It intends to fund the acquisition with $450 million to be raised from an institutional placement and $1.6 billion from a renounceable Entitlement Offer to shareholders. A further US$800 million could come from a committed bridge acquisition facility as well as existing cash.
Boral made the strategic acquisition as a way to position itself in the US market "at an attractive point in the cycle". Indeed, there has been a strong lift in housing starts in the United States, with Trading Economics reporting a 25.5% lift from the previous month to a seasonally adjusted annualised rate of 1.32 million in October 2016.
At the same time, it is expected there will be a significant investment in infrastructure under a Donald Trump presidency.
While it's possible that the acquisition will be a success, Boral is paying a high price for the business. It's paying approximately 10.6x EV/Adjusted EBITDA (that is, enterprise value divided by adjusted earnings before interest, tax, depreciation and amortisation). Headwaters has recorded solid growth, but if that growth slows down, the $3.5 billion being paid for the business could look very expensive in hindsight.
Now What: Acquisitions are often a risky way to grow a business, with many going awry historically. There is little doubt that the prospect of Boral undertaking such a huge acquisition has played a key role in shareholders selling the business down so heavily today.
Investors may want to remain on the sidelines and wait for some more positive signs that the integration process is going according to plan before dipping a toe into its shares.
