James Hardie Industries plc (ASX: JHX) shares are on the slide today after the company announced a major acquisition.
At the time of writing, the ASX 200 stock is down 11% to a 52-week low of $41.51.
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James Hardie shares crash on big new
Investors have been selling the building materials giant's shares today after it agreed to acquire The AZEK Company Inc. (NYSE: AZEK) in a deal valued at $8.75 billion (A$14 billion), including AZEK's net debt.
According to the release, the acquisition will be funded through a combination of cash and James Hardie shares.
AZEK shareholders will receive $26.45 in cash and 1.0340 James Hardie shares listed on the New York Stock Exchange (NYSE) for each AZEK share they own.
Based on James Hardie's last closing price, this represents US$56.88 per share and a 26% premium to AZEK's 30-day average trading price. Upon completion, James Hardie shareholders will own around 74% of the combined company, with AZEK investors holding the remaining 26%.
It seems that the market believes the company is overpaying for the deal based on how James Hardie shares are performing today.
A new building materials powerhouse
The release notes that James Hardie and AZEK's combination will create a leading supplier of exterior and outdoor living products. AZEK brings complementary offerings in decking, railing, and pergolas, which align well with James Hardie's expertise in siding and trim.
The companies believe this will strengthen their market position and accelerate growth.
James Hardie CEO Aaron Erter said the deal represents a "unique opportunity" to drive growth and increase profitability. He said:
We are uniting two highly complementary companies with large material conversion opportunities and shared cultures centered around providing winning solutions to our customers and contractors. Together, we will be well positioned to drive sustained above market growth as a leader across attractive categories for the exterior of the home. The consumer journeys for siding and decking often overlap and both companies have excelled at demand creation for the homeowner and innovative products and solutions for the contractor.
This sentiment was echoed by AZEK CEO Jesse Singh. He said:
Together with James Hardie, we are delivering value to AZEK shareholders and providing them meaningful participation in the longterm secular and financial growth opportunities created by the combined company. We are bringing together two customer-centric organizations with a shared commitment to innovation and building a better, more sustainable and resilient future, and we are excited about the opportunities ahead.
Financial impact and future outlook
Although the market's reaction might say otherwise, the acquisition is expected to be a big boost to James Hardie's growth.
Over the next five years, management expects annual sales growth to accelerate by 250 basis points and adjusted EBITDA growth by 300 basis points. The combined business will generate around US$5.9 billion in net sales and $1.8 billion in adjusted EBITDA annually.
It notes that one of the key strategic benefits is the expansion of James Hardie's addressable market in North America to US$23 billion. Both companies have historically benefited from "material conversion", where homeowners replace traditional materials with more durable alternatives. Management sees significant potential to accelerate this trend.
The deal is also expected to improve James Hardie's financial profile. Once cost synergies are fully realised, the company anticipates generating more than US$1 billion in free cash flow annually. Some of this will be used for share buybacks, with up to $500 million planned in the first year post-acquisition.
James Hardie shares are down 32% over the past 12 months.
