USG's Sale a Good Move
The sale of the L&W Supply business will improve this building-material maker's profitability while also dampening its cyclicality.
Narrow-moat USG announced that the company entered into a definitive agreement to sell its L&W Supply business for $670 million, or approximately 12.9 times the segment’s trailing 12-month EBITDA. The L&W Supply segment is a leading distributor of gypsum wallboard and other building materials in the United States with sales of $1.4 billion in 2015. ABC Supply, a privately held wholesale distributor of roofing, siding, window, and other building products, is the acquirer. USG will use the sales proceeds to pay down $600 million of outstanding debt, resulting in a net leverage ratio of approximately 2 times, which is at the high end of management’s long-term leverage target. The company will likely utilize its increased financial flexibility to fund approximately $300 million of capital expenditures for advanced manufacturing initiatives over the next three to four years, which are ultimately expected to drive significant cost savings and up to $100 million of incremental EBITDA by 2020. After accounting for the puts and takes of this announcement, we are increasing our fair value estimate to $24 per share. We see improved profitability resulting from the company’s manufacturing improvement initiatives as more than offsetting lost cash flows from the low-margin L&W Supply business.
We think the sale of the L&W Supply business will improve USG’s profitability while also reducing the company’s cyclicality. Although the L&W Supply segment generated 38% of the consolidated company's 2015 sales, the segment only accounted for 7% of consolidated operating profit. L&W Supply has been USG's least profitable segment over the past several years, and management estimates that the sale dampens operating profit volatility by 20%. We like that the company is using the sale proceeds to pay down debt, which will allow the company to operate within its targeted capital structure.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Brian Bernard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.