CRH: Unlocking further growth through mergers and acquisitions with the acquisition of Barrette

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CRH SA (NYSE: CRH), a major player in building materials in the United Kingdom and the United States, is continuing its strategic repositioning with the acquisition of Barrette, a provider of residential fencing and railing solutions, from TorQuest Partners and Caisse de Quebec Deposit and Placement (CDPQ) for $1.9 billion. The deal fits well with its plans to move distribution away from the US (~55% of sales) and European (~35% of sales) infrastructure and residential markets. More broadly, this also highlights CRH’s ability to recycle capital in an accretive manner, given that the acquisition follows the acquisition of approximately $3.8 billion. arrangement of its Building Envelope business and is accompanied by an attractive post-synergy valuation multiple. As CRH unlocks more value from its capital allocation strategy and achieves its growth objectives over time, the stock is expected to revalue against peers such as Kingspan (OTCPK: KGSPY) and Geberit AG (OTCPK: GBERY).

CRH vs EV peers to EBITDA
Data by YCharts

Barrette Acquisition Details

Mergers and acquisitions have always been at the heart of CRH’s growth model, but their importance has increased in recent years as the company conducts a strategic repositioning of its activities. In this vein, CRH announced an agreement to acquire Barrette Outdoor Living from TorQuest Partners and CDPQ for an enterprise value of $1.9 billion. For context, Barrette is North America’s leading provider of residential fencing and railing solutions sold through specialty retailers, home centers and lumberyards. In particular, the company is focused on improving home improvement maintenance (RMI) with more durable and long-lasting products such as PVC and aluminum, both of which are seeing increased penetration. The transaction price represents a transaction multiple of approximately 10x EV/EBITDA pre-synergies and will be funded by CRH’s well-capitalized balance sheet. Subject to regulatory approval, the deal is expected to close in the second half of 2022.

Accretive recycling of capital

Barrette’s deal follows CRH’s sale of its Building Envelope business for an enterprise value of $3.8 billion (including $3.5 billion in cash and $0.35 billion from the transfer lease liabilities), implying an EV/EBITDA multiple of around 11x. In comparison, Barrette maintains margins of around 20% on an EBITDA of 190 million dollars, the pre-synergy multiple of around 10x EV/EBITDA implying an accretive recycling of capital by CRH. That said, I suspect there is still plenty of room for the multiple to sink even lower to

Remember from CRH’s latest investor update that on the capital allocation front, much of the long-term value creation option will be driven by growth investments such as acquisitions targeted and platform mergers and acquisitions, as well as expansion investments. Excess cash will then be allocated to shareholder returns, presenting an advantage over the current single-digit annual growth in dividends and share buybacks (currently at a rate of $1.2 billion per year). Compared to the company’s forecast of approximately $30 billion in capital deployment over the next five years, an increase in net debt/EBITDA to approximately 1x in 2022 (vs. approximately 0.6x previously) still leaves >20 billions of dollars of financial capacity after the transaction. Thus, I see ample room for further upside through more trades and redemptions through 2025.

CRH financial capacity objectives


Positive strategic implications

From a strategic perspective, the Barrette product suite fits perfectly with CRH’s Architectural Products (APG) business, which includes residential fencing and railing solutions in North America. It should be noted that Barrette has strong positions in the market for patio, decking, lawn and garden products, which, added to CRH’s APG segment, should extend the avenue for growth and margin improvement. Its main sales channels (consumer and professional) are also similar, while the expanded range should strengthen CRH’s share of wallet over time. While skeptics may push back on the addition of Barrette’s RMI exposure at this point in the cycle, I would say the product suite also allows CRH to capitalize on the structural trend of PVC/vinyl use/conversion in the categories of fences and terraces (mainly for reasons of durability). Overall, the series of transactions is in line with CRH’s focus on building horizontally (ie infrastructure and residential) and should generate a less cyclical earnings base over the long term.

Unleashing Further M&A-Led Growth with Acquisition of Barrette

Overall, I view the acquisition of Barrette for $1.9 billion as another positive step for CRH, adding clear strategic benefits by improving the Architectural Products business at a reasonable pre-synergy EV/EBITDA multiple. ‘about 10x. This could drop below ~8x though, depending on synergies, which I believe demonstrates management’s discipline and ability to recycle capital accretively. That said, the acquisition is not too large in the context of the group as it represents a mid-single-digit % of the group’s EV and therefore there is still plenty of flexibility in the balance sheet for new reinvestments or returns to shareholders all the way. At the current valuation of ~6x EV/EBITDA, CRH stock is trading well below its peers (e.g. Kingspan and Geberit) despite a promising growth trajectory driven by M&A and a less cyclical earnings profile .

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