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.
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Brian Bernard does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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