Vice President: Aum Raithatha
Analysts: Sia Jain, Aanya Chowbey, Steven Brakespeare, Kostadin Iliev
Deal Overview
Acquirer: Holcim Group
Acquiree: Duro Last
Deal size: $1.293 billion
Buy side advisors: Freshfields
On 7 February 2023, Holcim, the world’s largest cement maker, announced its agreement to buy U.S. roofing systems manufacturer Duro-Last in a deal valued at $1.29 billion. The Swiss French multinational has actively been making acquisitions in North America and is its biggest one since its acquisition of Malarkey in December 2021.
Holcim Overview
Holcim Group, formerly HolcimLafarge, was formed by the 2014 mega-merger between Holcim and Lafarge. Currently, the company operates in around 70 countries employing about 72,000 people. It operates in four main business segments: concrete, asphalt, mortar and other building materials. Headquartered in Rapperswil Jona, Switzerland the industrial giant raked in $2.5 billion in profits from sales of $29.4 billion in 2022. Their deal for Duro-Last advances Holcim’s “Strategy 2025 - Accelerating Green Growth” which aims to make its Solutions & Products business 30% of the group’s net sales by 2025, entering the most lucrative construction segments.
Duro-Last Overview
Duro-Last is a private family business with a leading position in US commercial roofing systems, with over 2 billion square feet of Duro-Last membrane having been installed throughout North America. It has a track record of double digit growth in the continent’s highly profitable roofing market due to its leading brands, proprietary technologies and custom made solutions. Duro-Last is also known for its leadership in sustainability related innovations, being the first company in the US to offer third party verified environmental product declarations for its thermo plastic roofing solutions.
Industry Analysis
The construction industry saw 3890 M&A deals in 2022, indicating a 33% drop in deal values from 2021 (1). In terms of regions, this was led by North America M&A activity (1500 deals worth $172 billion).
Nonetheless, the size of the global market continues to grow and is projected to reach $14.4 trillion by 2030 as shown below
Source: Statista
The North American construction industry specifically is predicted to have a growth rate of 4.84% between the years 2022-27 (2). This can be partly owed to innovation due to fierce competition in the industry. Nonetheless, with barriers to entry, a technological edge can help firms increase their market share. While Duro Last is regarded for its innovative practices, it is still a small player in the industry and does not hold a strong competitive position in the market.
The industry is generally sensitive to macroeconomic changes as it depends closely on economic growth and consumer confidence, both of which are influenced by macroeconomic factors such as interest rates and inflation.
A few recent deals in the industry that reflect this is the acquisition of Howden Group by Chart Industries (3). Interestingly, it also illustrates how companies based in different countries- Howden Group in the UK and Chart Industries in the US- can harness the opportunities in new markets and high growth areas. The deal also highlights the growing demand for new technologies and innovative practices in the sector.
Historically, one of the biggest deals in the industry was coincidentally the Holcim-Lafarge deal in 2015 (4). The merger was valued at $44 billion and it created the world’s largest cement manufacturer. The significance of this deal stretched beyond the deal valuation, as it heavily impacted the cement industry globally too. An extraneous chronicle of this deal was when it nearly collapsed due to Lafont (chief executive of Lafarge) choosing to fly to the US via a private jet instead of commercial flights. It went against Holcim’s company guidelines and nearly cost the deal.
Overall, the numbers are still significantly low, compared to pre-pandemic levels as shown below (5).
Source: Capstone Research
The industry at large generates approximately 39% of the world’s carbon emissions (Source: World Green Building Council). Subsequently, the current trend in the industry is the need for sustainable construction and practices. Holcim, famous for its innovation and sustainable endeavours embodies this. This is complemented by Duro Last’s technologies. While sustainable technologies help meet new regulations, they also act as a cost saving mechanism allowing companies to reduce their energy consumption.
Obstacles have changed in the industry, with regulatory hurdles with regards to sustainability being a major concern. Regulations such as CPR (Construction Products Regulation) and the European Green Deal add additional scrutiny on construction companies (6).
Holcim operates in more than 70 countries including Asia-Pacific, while Duro Last has a stronger foothold in North America and Europe. Together, Holcim and Duro Last create strong synergies while harnessing each other’s advantages to meet current technological and sustainable demands in different regions across the world. As the graph below indicates, Holcim has increasing net sales in almost all regions of the world, as well as an adequate presence globally.
Source: Statista
Deal valuation
Financial Analysis
The transaction, valued at $1.293bn, represents a 2023 EBITDA multiple of 11.9x or 7.4x after accounting for synergies. With this acquisition, Holcim’s roofing systems is expected to exceed $4bn in net sales ahead of schedule. Last year, they successfully transformed the company to accelerate green growth, achieving 19% of net sales from Solutions & Products and expanding in the most attractive North American market (7).
The American roofing systems company Duro-Last has annual sales of roughly $540 million. The deal is expected to yield synergies of around $60 million per year, mainly from cheaper procurement of materials (8). Since the deal will allow Holocim to have better manufacturing capabilities and more diverse offerings, it may take more than a couple of years to fully integrate both operations to leverage and realise efficiencies.
The deal is earnings per share accretive from the first year. In light of the company’s record 2022 financial performance, the Board of Directors has proposed a 14% increase in dividend to CHF 2.50 per registered share (9). As of now, Vontobel analyst Pomrehn suggests Holcim’s transformation towards an asset-light, innovative, low-carbon construction solutions provider is not yet fully reflected in its valuation. With a strong outlook promised for 2023, an increasing EPS is anticipated given risk is adequately mitigated. However, if the Fed takes a more hawkish approach and interest rate hikes are more than estimated, this can slow down the growth of both dividends and EPS.
Holcim CEO Jenisch said in an interview this week that the company has “the strongest balance sheet ever, which opens up many opportunities for continued acquisitions and investments” (10).
Holcim Performance Overview, 2021-2022 (9)
In the first nine months of 2022 Solutions & Products boasted a recurring operating profit margin of 20%, better than the 16% level for Holcim as a whole (8).
In 2022, Holcim delivered record financial results with CHF 29.2 billion in net sales, CHF 4.8 billion in Recurring EBIT, 9.5% ROIC and a record leverage ratio of 0.9x (9).
Holcim expects continued profitable growth with:
Net sales growth of 3%-5% like-for-like (LFL)
Over-proportional growth in Recurring EBIT (LFL)
Free Cash Flow after leases of around CHF 3 billion
Reduction of CO2 per net sales by over 10% (9)
Comparable Company Analysis
Important Note for Comparables: Duro-Last was privately owned so no financial data was available to complete the comparables, there are however similar companies which we can explore to see what figures Holcim was looking for when they acquired Duro-Last.
The control companies shown here are all in the construction business, more specifically roofing (which is Duro-Last’s business) and they all operate within the US or a majority of their business is conducted in the US.
Growth margins
The trend for the growth margins is a big positive change from 2021-2022 accompanied by a decline for the predicted growth in 2022-2023. We can see that analysts are expecting a more difficult year for the construction sector. More notably, the mean for the revenue growth multiple is set to fall from 25.16% to the negative - 1.43% from ‘21-’22 to ‘22-’23, a very sharp decline perhaps linked to rising rates. EBITDA Margin and Profit Margin did get lower from the previous year, however, the decline is small (around 1% change in the mean). Apart from Revenue Growth, the other two multiples still are in a good position in 2023.
Trading Multiples
The trading multiples don’t show much change from ‘22-’23. What’s interesting is that the EV/EBITDA and the P/E multiples are way higher than the EV/Revenue multiple. It's common to see lower revenue multiples and higher EBITDA multiples compared to other industries. This is because construction companies tend to have high capital expenditures and low margins due to competition and the cyclical nature of the industry.
Comparable Transactions
Cornerstone Building Brands, Inc. – Golden Gate Capital (previous owner of the company) sold its shares to Asset management firms: CD&R Friends & Family Fund VIII, L.P. ; CD&R Investment Associates X, Ltd. ; Clayton, Dubilier & Rice VIII, L.P. ; Clayton, Dubilier & Rice, LLC. The acquisition aimed to combine Cornerstone Building Brands with Ply Gem, which was previously acquired by CD&R in 2018, to create a leading North American exterior building products company with a comprehensive range of solutions.
Henry Company LLC (NYSE:CSL) - American Securities LLC (previous owner of the company) sold the company to Carlisle Companies Incorporated who are looking for synergistic acquisition in order to have a more organic growth.
Firestone Building Products Company, LLC – The company produces and markets rubber products for a number of different vehicles such as: light truck, commercial truck and bus, agricultural, motorcycle, kart, aircraft, and motorsports and racing tires; off-the-road tires for heavy-duty applications for construction, mining. Firestone is being acquired by Holcim who are also the buyers of Duro-Last.
Continental Building Products, Inc. – The company manufactures and sells gypsum products for construction and sells the products to distributors, wholesalers, buying groups and mass merchants. Lone Star Americas Acquisitions, Inc. (previous owner) is and asset management firm that sold Continental Building Products to CertainTeed Gypsum & Ceiling USA, Inc., a company that also sells and distributes gypsum construction materials. It is important to note that whilst CertainTeed Gypsum & Ceiling USA, Inc. is based in Florida, Continental Building products is based in Virginia. Continental Building Products was acquired by CertainTeed (part of Saint-Gobain) to expand its product portfolio and strengthen its position in the North American gypsum board market.
Holcim’s intention to buy Duro-Last in order to boost their less carbon-intensive side of the business and get a bigger stake in the roofing business in the US is similar to that of the other M&A deals. Continental Building Products, Inc. along with Cornerstone Building Brands, Inc., Firestone Building Products Company, LLC and Henry Company LLC (NYSE:CSL) were acquired in order to have a bigger market share and dominance in the region and the deals are in the $1.5-5B dollar range, however, Duro-Last’s acquisition is also fuelled by Holcim determination to make their business less dependant on carbon-intensive practises such as producing concrete.
From the analysed deals we can see that Holcim’s intentions differ a bit from the other competitors. The ESG factor is an important part of their decision to buy Duro-Last. Although the real estate market and subsequently the construction business in the US is expected to have a turbulent year, that doesn’t stop companies such as Holcim and Cornerstone Building Brands from expanding their business.
Deal rationale
The acquisition is expected to generate $60 million annually, primarily from lower material procurement costs, presenting an EBITDA multiple of 7.9 after synergies. This acquisition also achieves sustainability targets and innovative technologies for both the acquirer and target. Holcim’s ‘Strategy 2025 – Accelerating Green Growth.’ – a long-term plan to transition towards a more sustainable and carbon neutral future.
Sustainability targets
As a part of the strategy, Holcim aims to acquire Duro-Last’s energy-efficient systems and excellence in recycling in the roofing industry to strengthen its commitment into sustainability. In particular, to achieve its net-zero goal by 2050. For example, Duro-Last’s energy-efficient ‘cool roofs’ that reflects the sun’s energy to reduce energy cost, which reduces building energy consumption by 40%, will be a main focus in their roofing sales. Its award-winning ‘recycle your roof’ initiative, where they recycle old roofs at the end of their usage life through their Take Back programme, will also be utilised in Holcim’s operations (11). By acquiring the sustainable innovation copyrights, Holcim will be able to provide a ‘broad range of innovative and sustainable building solutions,’ said Jan Jenisch, the CEO of the Holcim Group.This allows them to provide more sustainable products and solutions that reduce carbon emissions, as well as their promised circular economy principles.
Diversify into the roofing division
The plan also includes a strategic goal to expand the Solutions & Products section, particularly the roofing and insulation sector, with a target of 30% net sales achieved from Solutions & Products by 2025. This is for their vision of becoming a global leader in roofing with pioneering technology and to achieve energy efficient buildings. The roofing division is significant for Holcim’s long term growth profile because the division demonstrated great growth potential, as evidenced by the 54% growth in net sales in their S&P division. This has contributed towards a 12.9% growth in the group net sales over 2022. Since the acquisition, they are estimated to reach net sales of U$4bn, putting them on a strong track for achieving their target of 30%. Additionally, its diversification into the roofing sector supports its long term growth profile with a broad range of solutions that support their vision of energy-efficient buildings.
Consolidating market power in North America
Duro-Last is an American roofing company that primarily serves commercial building markets in the United States and Canada. This acquisition aims to bolster Holcim’s power in the North American roofing industry, complimenting their roofing division of Firestone Building Products that already was the fourth company by global market for flat roofing systems share (12). This would also assist in the Swiss group’s influences in their other divisions in the American Area. Additionally, the US Inflation Reduction Act that aims to curb inflation via more investment into cleaner energy is expected to boost its sales by 10%, as more businesses can receive tax benefits from adopting environmentally-friendly equipment. This acquisition is estimated to yield an excess of $4 billion sales at Holcim’s roofing division by 2025, taking up 10% of the North American roofing market.
Innovation
Duro-Last is unique in the industry with its copyrighted roll roofing membrane that differentiates it from its competitors. Duro-Last roofing membrane is unusual in that it is custom-fabricated to assure an exact fit for each building's unique roof size and shape. It is also extremely tough, impervious to punctures, and has great waterproofing properties. Furthermore, the membrane is energy-efficient and can help to get LEED certification for sustainable construction techniques. Therefore, Holcim is able to utilise this technology in its own roofing sector. Additionally, Duro-Last University is an educational platform with intellectual property rights such as whitepapers and case studies of the roofing industry. Holcim can use the study materials to improve and expand its present product offerings while also investigating new talent recruitment options for its roofing company. With these resources, the company can educate and pique the interest of new recruits in the career opportunities in this industry. Both of which Holcim would utilise to strengthen and build its innovation in the future (13).
Risks
The deal is expected to close by the second quarter of 2023, subject to customary conditions and regulatory clearance in the US7. It faces low regulatory risk, as Holcim is making efforts to align with ESG requirements and improve sustainability. Advancing their leadership in sustainability, Holcim reduced our CO2 per net sales by 21% in 2022. Its ESG profile reached an industry-leading ranking with Moody’s, coming first in its sector with a score of 71 on 100. Holcim continued to invest in sustainability - its Green CAPEX reached CHF 403 million which was 15% higher than in 2021 and 28% of the 2022 total. Moreover, Holcim upgraded its 2030 net-zero targets to be in line with the 1.5℃ scenario, and validated them with the Science Based Targets initiative9. Therefore, the deal is likely to get approved.
As always, the company acquiring is always subject to financial risk as M&A deals can place a huge cash burden on companies if not executed properly. Last year, Holcim executed 20 acquisitions. Given that Holcim has already acquired 7 companies in the first two months of 2023, and they are continuing to fasten the pace10. Therefore, ensuring smooth management especially in the transitory period will be key in mitigating liquidity and operational risk.
Conclusion
M&A deals in the construction industry seem to be in the range of $1.5-5 billion, which provides a general benchmark for the Holcim Duro-Last deal. Moreover, the trading multiples suggest that EV/EBITDA and P/E multiples are higher than EV/Revenue, which is common for the construction industry due to the nature of the business. In addition, Holcim's acquisition of Duro-Last seems to be motivated by the desire to expand its roofing business and to reduce its carbon footprint, which sets it apart from the other M&A deals. This focus on ESG factors may have influenced the valuation of Duro-Last and the terms of the deal. While a precise analysis of the valuation cannot be provided due to limited data, it is clear that the Duro-Last acquisition by Holcim is consistent with the trend of consolidation in the construction industry and reflects the company's strategic focus on sustainability.
The acquisition of Duro-Last will help Holcim achieve its strategic goal of expanding in the Solutions & Products section, particularly the roofing and insulation sector, the former being more significant for Holcim's long-term growth profile because of its demonstrated great growth potential. The consolidation of market power in North America will also help Holcim to achieve its strategic objectives. Finally, the acquisition of Duro-Last will bring significant innovation to Holcim, with access to copyrighted roll roofing membrane and an educational platform with intellectual property rights, which will allow Holcim to strengthen and build its innovation in the future, thereby enhancing its competitiveness in the market.
The deal between Holcim and Duro-Last is also expected to have a positive impact on Holcim's financial performance given the acquisition is expected to generate $60 million in annual revenue and achieve targets through Duro-Last's energy-efficient systems and recycling excellence. While the acquisition presents financial risks, given Holcim's track record of successful acquisitions and its efforts to manage liquidity and operations, the company is likely to execute the deal properly.
Overall, the acquisition of Duro-Last by Holcim presents a strategic fit and is expected to generate significant benefits for the acquirer, including revenue growth, diversification, market power consolidation, and innovation.
References:
https://www.globaldata.com/store/report/construction-industry-m-and-a-deals-by-theme-analysis/
https://www.mordorintelligence.com/industry-reports/north-america-construction-market
https://www.investmentmonitor.ai/features/the-three-cross-border-ma-deals-that-shaped-the construction-sector-in-2022/
https://www.ft.com/content/41d317c8-d14e-11e4-98a4-00144feab7de
https://www.capstonepartners.com/wp-content/uploads/2022/04/Capstone-Partners-Construction Services-MA-Coverage-Report-April-2022.pdf
https://www.forbes.com/sites/sap/2021/08/25/the-construction-industry-is-getting-greener-why-how and-whats-changing/?sh=6b71557f52bc
https://www.financierworldwide.com/fw-news/2023/2/9/holcim-agrees-12bn-duro-last-deal
https://www.reuters.com/markets/deals/holcim-acquire-us-roofing-systems-firm-duro-last-129-bln 2023-02-07/
https://www.holcim.com/media/media-releases/full-year-2022-results
https://www.holcim.com/media/media-releases/holcim-acquire-duro-last-roofing-systems
https://www.knowesg.com/tech/holcim-acquires-duro-last-to-accelerate-green-growth-10022023
https://www.holcim.com/sites/holcim/files/documents/presentation_acquisition_firestone_building_prod ucts_from_bridgestone_americas.pdf
https://duro-last.com/university#whitepapers
Note: The opinions expressed in the reports are those of the members of the Junior IB team and are not affiliated with any university or institution. The financial recommendations provided are for educational purposes only and the Junior IB team takes no responsibility for any losses that may occur from implementing any ideas presented in the reports. The Junior IB team is not authorized to provide investment advice. The information, opinions, and estimates presented in the reports reflect the Junior IB team's judgment at the time of publication and are subject to change without notice. The price, value, and income of any securities or financial instruments mentioned in the reports may fluctuate. The Junior IB team has no business relationship with any of the companies mentioned in the reports and does not receive any compensation for their inclusion.
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