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Don't bet on Boral

Paul Rickard
Thursday, November 24, 2016

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By Paul Rickard

It's somewhat ironic that Boral’s slogan is “build something great”, because if Boral’s acquisition of Headwaters, a US manufacturer of building products and marketer of fly ash, proves to be successful, then it will be transformative for Boral and it will be a great Australian company again. But history is betting against Boral.

The track record of Australian companies making acquisitions in the USA and the UK is littered with failures. To cite just a few examples: NAB with Yorkshire/Clydesdale Banks in the UK; AMP with Pearl Insurance in the UK; BHP with US shale oil and potash; Slater & Gordon with Quindell. Even Boral’s earlier acquisitions in the US haven’t worked - last year, Boral’s USA division returned just 5.0% pa on the funds employed, and this followed a woeful 0.7% pa in FY15.

That doesn’t mean foreign acquisitions can’t succeed. Obviously, some do, but because a premium is paid to win control and the economics usually rely on those elusive “synergy benefits”, more fail than succeed. Maybe it's also a reflection on the ability of Australian management to compete in bigger markets, rather than the smaller and relatively homogeneous market in Australia.

And while it looks like the institutional market has given this deal an early thumbs up, with more than 90% of institutional shareholders participating in the capital raising to fund Boral’s acquisition, this hasn’t always proved to be a good predictor. The market also gave the thumbs up to raisings by Slater & Gordon, Vocus, and back in September/October, to JB Hi-Fi for its acquisition of Good Guys. Institutions paid $30.25 and $29.40 respectively for shortfalls in the JB Hi-Fi issue - JB Hi-Fi shares closed yesterday at $26.62.

Can Boral succeed? I hope so, because our market needs great companies that are prepared to take measured risks to grow. They have a great CEO in Mike Kane who knows the US market, so that’s a good starting point. But this $3.5bn acquisition looks like a big deal ...

Headwaters Inc

I need to acknowledge upfront that I had never heard of Headwaters Inc. until Monday, nor did I know much about fly ash, so my data source for this article is the Boral “spin” document (otherwise known as the Investor Briefing). It's more than likely that my situation is not unique.

The acquisition of Headwaters brings US$1.1bn in revenue and adjusted EBITDA in FY16 of US$218m. Headwaters operates through two core divisions - building products and construction materials. Building products operates from 34 locations, generates 65% of the revenue, and manufactures products such as trim and siding, stone, block, windows and roofing that are primarily used in the residential market. Construction materials collects fly ash from 68 sources and distributes this from 25 terminals to the US construction industry. Fly ash is a by-product from coal fired power stations, and is used as cement substitute in ready mix, in asphalt and as filler in engineered products.


Boral’s substantiates the acquisition by saying firstly that the deal is transformative. It significantly increases Boral’s exposure to large addressable USA building and construction markets which are experiencing positive momentum. With exposure to more diverse and growing end markets, Boral will be better positioned to deliver sustainable growth and improved earnings. Boral’s USA business will contribute 38% of group revenue when Headwaters is fully integrated, up from 19% today.

The second reason cited is the strategic fit with Boral’s existing business. The combination of complementary businesses adds scale to Boral’s USA footprint. It significantly scales Boral’s fly ash business, creating a national platform and going from a US$100m business to US$450m business. Boral is bullish on demand for fly ash from rising demand for cement, fly ash prices, and the opportunity to increase margin.


Boral is also keen on the growth prospects for light building products, such as trim, siding, moulding, shutters and decking, and views Headwaters as delivering a platform that provides geographic breadth and attractive niche products for high- and low-end housing.

From a financial point of view, Boral says that there are substantial synergies and that the deal is EPS accretive on a proforma FY17 basis. It estimates synergies of USD100m pa within four years of transaction completion. Boral is buying Headwaters on an implied acquisition multiple of 10.6 times forecast FY17 EBITDA, which falls to 7.5 times if the full annual synergy benefits are realised. The acquisition will need to be approved by regulatory authorities, as well as a vote of Headwaters shareholders. Closing is expected mid calendar year, 2017.


Boral is funding the transaction of US$2.56bn (about A$3.51 bn) through a A$450m institutional placement at $4.80 (completed yesterday), a renounceable entitlement offer of A$1.6bn, debt funding of A$1.1bn and the drawdown of existing cash. Boral’s gearing (defined as net debt to net debt and equity) will rise from 20% to 30%.

The entitlement offer will also be conducted at a price of $4.80, a 22% discount to Boral’s closing price last Friday, and a 15.1% discount to the theoretical ex rights price of $5.66. It will be conducted on a 1 for 2.22 basis - that is, an entitlement to 100 new shares for every 222 shares already held. For example, if a shareholder owns 2,000 Boral shares, they will be entitled to purchase 901 new shares at $4.80 each.

Retail shareholders will have 3 choices. Take up the new shares at $4.80; sell the entitlements on the ASX, with trading to commence today under stock code BLDR; or do nothing. If they elect to take no action, their entitlements will be auctioned in a shortfall bookbuild. If institutions are prepared to pay more than an effective $4.80, then retail shareholders will receive any excess over $4.80.

The timetable for the funding is set out below:

What to do

The risk/reward trade says to get out, wish the Boral team well, and watch from the sidelines. That doesn’t necessarily mean selling your Boral shares (unless you need the cash or have a better investment idea), but it does mean not putting more money in to take up your entitlements.

Shareholders who have a reasonable parcel and can access low brokerage should consider selling their entitlements on the ASX. Trading only goes for seven days and ceases on Friday week (2 December). Shareholders with small parcels should take no action and let their entitlements be sold into the retail shortfall bookbuild.

Disclosure: The author owns Boral shares.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Published: Thursday, November 24, 2016

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