Builders' Big Deal: Opportunity mixed with debt

Wall Street reacted positively to the Builders FirstSource plan to acquire ProBuild Holdings. Shares of BLDR increased 17% on Tuesday, on top of a 68% gain on Monday.

According to an industry source speaking on background, Warburg Pincus provided financing for the transaction -- a $1.63 billion deal -- after Fidelity’s Devonshire Investors arm had been shopping around the ProBuild Holdings business to a handful of possible buyers, including other private equity firms.

In the end, it was Dallas-based Builders FirstSource that wrote the press release explaining the benefits of the deal. Those benefits, the company said, include an enhanced product offering, significant cost savings, limited overlapping regional coverage and the opportunity to ride the housing recovery as a diversified national  dealer.

Sales at ProBuild were about $4.5 billion in 2014. That’s almost three times the sales at Builders FirstSource -- about $1.6 billion.

One observer speaking on background described the deal as a win on multiple levels, as it shows the investment community standing up for the lumber and building material industry “in a very big way.”

Another reason for the industry to welcome the combination of the two pro dealers is the deal’s potential to relieve some of the competitive pressure that have built up in those markets where both banners compete head-to-head. A map of the footprint of the combined companies shows large swaths without any overlap, but some redundancy in Texas, Florida, Tennessee and the mid-Atlantic states.

At last count, Builders had 80 locations, compared to ProBuild's 364 locations.

Some sources expressed concern over the debt involved in the deal. On a pro forma basis, the combine company has net debt of $2.1 billion. The company pointed to a financing plan that included $1.6 billion from new debt.

The debt is big, but so are the cost savings. Builders anticipates $100 million to $120 million annual run-rate cost savings within two years. And the timing, according to Floyd Sherman is right. "Together, we will establish a broader, more efficient platform of manufacturing and distribution capabilities, supported by high-quality service from the best talent in the industry.”

Another industry executive, less optimistic than the first, pointed to “two billion dollars of debt on the balance sheet in an industry that doesn’t like leverage."

In addition to overcoming debt, observers pointed to the standard challenge of cultural and systems integration. 

"There is a great opportunity here for Floyd [Sherman] and the team, but it's not one that's going to be easy, and it won't be any more easy with the high level of debt put on the company."

In the meantime, the announcements of job cuts are expected as a matter of course.

"They’re counting on some major synergies and major cost cutting efforts," said the industry source. "There are a lot of people who are going to be left without jobs."

“Wall Street loves it,” another source said. “We’ll see if the customers love it or not.”