Builders FirstSource has entered into a definitive purchase agreement to acquire ProBuild Holdings in an all-cash transaction valued at approximately $1.63 billion.
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The transaction, which was approved by the Builders FirstSource board, is subject to customary closing conditions and regulatory approvals and is expected to close in the second half of 2015.
ProBuild was created in 2006 by Devonshire Investors, the private equity firm affiliated with FMR LLC, the parent company of Fidelity Investments. With approximately $4.5 billion in revenue in 2014, ProBuild is one of the largest distributors of building materials to professional builders, contractors and project-oriented consumers in the United States.
ProBuild operates lumberyards, component facilities, millwork shops, gypsum yards and retail stores across 40 states. Together, Builders FirstSource and ProBuild will have an enhanced portfolio of products with increased breadth and depth within its categories, including lumber, windows, doors, millwork, hardware, roof and floor trusses, engineered wood products, gypsum, roofing, metal and concrete products, cabinets and countertops.
In addition, the combined company will better serve its customer base through its broader scale and operating footprint, enabling it to deliver products and services more effectively and efficiently.
The combination creates a diversified national pro dealer with 2014 combined revenues of approximately $6.1 billion.
Upon completion of the transaction, the combined company will be better positioned to meet the needs of all customers in the highly fragmented professional building materials segment. The combined company will have a presence in 40 states and 24 of the top 25 metropolitan statistical areas (based on 2014 Single Family Home Building Permits per U.S. Census data).
Builders FirstSource brings to ProBuild significant sales expertise in value-added products, which combined with ProBuild's attractive customer mix, should result in enhanced sales growth of higher margin products.
The combination of Builders FirstSource and ProBuild is expected to generate a range of approximately $100 million to $120 million in annual run-rate cost-savings synergies in the first two years following close.
Actions to begin capturing a majority of these savings are expected to be implemented within the first 12 months following close through network optimization, procurement, and general and administrative costs. One-time costs of $90 million to $100 million are expected to be incurred to achieve these synergies during the first two years.
The U.S. single-family housing market is at near record levels of affordability and demonstrating a solid recovery. At today's level of approximately 1 million total housing starts per year, total housing starts still need to increase approximately 50% to reach the historic median and double to reach prior peak levels. The combined company expects to capitalize on its expanded financial profile through the recovery.
On a December 31, 2014 pro forma basis, the combined company had pro forma net debt of $2.1 billion, including lease finance obligations, which implies a multiple of 5.6x net debt / adjusted EBITDA, after giving effect to $110 million of annual run-rate cost-savings synergies, the midpoint of the expected range.
The combined company is expected to generate significant cash flow that will allow it to delever following the close of the transaction. This delevering will be driven primarily through cost savings realization, earnings expansion, and strong free cash flow generation from operations, further enhanced by the recovering housing sector and the utilization of tax assets. ■