Last Wednesday, shares in Boral Limited (ASX:BLD) came out of a trading halt after raising a whopping $2.05 billion dollars to fund its acquisition of leading United States-based building products manufacturer Headwaters Incorporated.
Boral's shares plummeted almost 19% over the course of the week as investors grew increasingly nervous about Boral's ability to successfully execute on the acquisition.
With Boral's shares currently trading well below their theoretical ex-rights price (TERP), and under the institutional clearing price of $5.25, I believe savvy investors should take a closer look at Australia's leading building materials company.
Share placement
Boral completed the institutional component of its capital raising last Wednesday, placing $1.58 billion to institutional investors at a clearance price of $5.25 per share for the shortfall.
Boral is currently completing its retail entitlement offer which entitles eligible shareholders (those who held Boral shares at 7PM on 24 November 2016) to acquire 1 new Boral share for every 2.22 ordinary shares they held at the record date, at an issue price of $4.80.
Based on its pre-trading halt closing price of $6.15 per share, the entitlement offer implies a TERP of $5.72 per share. Notably, however, Monday's closing price of $5.07 represents an almost 13% discount to its TERP.
This begs the question of whether investors are writing off the Headwaters acquisition too soon.
Growth outlook
Boral's thesis for buying Headwaters is to increase its footprint in the United States. Like James Hardie Industries Plc (ASX: JHX) already does, Boral hopes the latest acquisition will add firepower to its US presence and represent a substantial chunk of earnings going forward.
According to management forecasts, the Headwaters acquisition is expected to bring Boral's total US revenue to over US$1.8 billion, resulting in Boral generating almost 35% of revenues from America. The acquisition is expected to be earnings accretive by the end of the 2017 financial year, with synergistic benefits amassing to US$100 million within four years.
With Donald Trump's presidency rumoured to ignite a construction and spending spree in America, management believes the acquisition comes at an opportune time for Boral to leverage off Australia's housing construction boom and continue its momentum in America.
Whether this eventuates is yet to be seen.
Overpaying?
A possible reason explaining Boral's dramatic underperformance to its TERP is the fact that Boral is paying almost 10.6x Headwater's EV/EBITDA ratio – the measure of the "cost' of an acquisition, compared to its earnings.
Although this is expected to decrease to 7.5x post-acquisition, many investors believe Boral is paying a premium for Headwaters, especially given the nascent US recovery.
I beg to differ.
Foolish takeaway
It is undeniable that Boral's acquisition of Headwaters will provide significant synergies for both businesses, due to their highly complementary operations.
Accordingly, though the market may fear teething issues from the acquisition, in light of renewed US growth prospects and a rampant construction boom in Australia, I believe the current price for Boral is a good time to buy the stock.
