Why Beacon Roofing Supply Stock Jumped 10% on Thursday
What happened
Shares of Beacon Roofing Supply (NASDAQ: BECN) closed up 9.8% Thursday, after the company revealed an agreement to add one of the country's largest exterior and interior building products distributors to its business. Specifically, Beacon will be buying CRH plc's (NYSE: CRH) Allied Building Products Corp. subsidiary for $2.624 billion cash.
So what
Dublin, Ireland-based CRH is a $29.9 billion market cap European supplier of building materials -- about 10 times as large as Beacon. But CRH does nearly half its business in the United States. The Allied Building Products subsidiary that Beacon is buying is currently part of the latter business.
In its press release describing the transaction, Beacon noted that bringing Allied in-house will not only grow its roofing supplies business, but also add a wallboard and acoustical ceiling tile wholesale business, making Beacon "the fourth largest ... distributor" of such products "in the U.S., with more than $1 billion of revenue in the interior market category."
Overall, the combination will grow Beacon's business to $7 billion in total annual revenue. This will increase the company's size (by revenues) by about 64% and add about $0.50 to $0.60 in annual profits, not counting "incremental transaction-related amortization ... and ... acquisition costs" in the first year after the combination.
Now what
That sounds pretty good, and it explains why investors were so happy with Beacon stock on Thursday. The only note of caution I would add is that, to make all this happen, and to capture these extra profits, Beacon will be taking on about $2.7 billion in extra debt, raising its debt load to about $3.9 billion -- a sum about 50% greater than the company's own market cap.
Best case: Assuming America's housing market continues to boom, Beacon will have a long road ahead of it, paying down that debt. If the housing market slows or crashes, though, things could get a whole lot worse.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.