August 29th, 2016
This Deal Signals a Strong Bet on the Industry
This morning, it was announced that ABC Supply Co. Inc. and USG Corp have entered into a definitive agreement under which ABC Supply will acquire L&W Supply from USG for $670 million, primarily in cash. USG Corp. manufactures drywall, and its L&W Supply subsidiary specializes in drywall distribution.
This deal represented a real departure for ABC Supply, which has completed over a hundred acquisitions since the company’s 1982 founding. Historically, ABC has been focused primarily on acquisitions of distributors of exterior building products, such as roofing, siding and windows. With this acquisition, ABC Supply makes a key play on the interior of the home. USG Corp. released documents for a call this morning with analysts, in which the company indicated that it was receiving 12.9 times EBITDA in the sale of L&W Supply. At the very least, participants in the door and window industry should take this as a large and positive bet on the future of the building industry, in both the near and long term.
For USG, this divestiture represents a decision to reverse its previous market integration, having operated along the full spectrum from manufacturing to distributing drywall. Such an approach typically leads to channel conflicts, as potential customers grumble about a manufacturing supplier being out in the market competing for the same customers.
The use of proceeds by a large corporate seller makes another interesting statement about the overall market. In this case, the majority of the proceeds will be used to pay down debt at USG. That, along with the use of some of the money to buy advanced manufacturing equipment, would indicate a balanced view of the market by USG.
In other words, if we were earlier in the recovery or USG were more bullish in its market outlook, they would likely use the majority of the proceeds to invest in new equipment, build new plants and undertake similar strategies. Paying down debt, which was characterized as being part of a move to return capital to shareholders, is generally seen as an acknowledgment by a company that more attractive investment returns may existing outside itself, as opposed to inside. In other cases, a company might see a market softening in the years ahead and could decide that it wishes to enter that softer period with less debt.
Dialing in these opposing views, we would take the size of ABC’s bet and the strong multiple they were willing to pay for L&W Supply as bullish signs for the next few years of continued good growth.