(Bloomberg) — James Hardie Industries Plc Chief Executive Officer Aaron Erter defended the company’s $8.75 billion acquisition of home-decking provider AZEK Co. as the deal triggered a stock slump amid uncertainty about the health of the US economy.
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Shares in James Hardie closed down 14.5% in Sydney trading, the steepest decline in 10 months, after the deal was announced Monday, wiping about A$2.9 billion off the company’s market value.
James Hardie generates around 75% of its revenue from North America, but traces its roots to Australia and listed there in 1951. Including Monday’s slide, the stock has lost 34% in the past 12 months.
The cash-and-stock purchase of Chicago-based AZEK places a larger bet on the US housing market, essentially relying on the US consumer in a precarious investment climate. Risks to the US economy, which potentially include stagflation or even recession, are closely tied to President Donald Trump’s flagship tariff policies.
In an interview, Erter said he was focused more on the opportunities in the US for the combined group in the years ahead, rather than risks in the immediate future or fallout from Trump administration policies.
“I think it is a moment in time,” he said. “We’re looking at this over the long term, and the long-term prospects of this are very, very strong.”
“As the market comes back, we’ll be able to really accelerate and take advantage of that recovery,” Erter said.
The deal values Chicago-based AZEK shares at $56.88 each, a 37% premium to Friday’s closing price. The enlarged company will be listed on the New York Stock Exchange and offer products from home sidings and cladding to decking and railing, all pitched at an addressable market in North America worth $23 billion.
According to Erter, there are 40 million homes in the US that are at least 40 years old. “They’re going to need repair and siding, repair and trim, or they may want to add a deck,” he said.
Barrenjoey analysts said that while they can see the strategic rationale for the deal, the 37% premium is “significant.”
That means “full synergy realization as well as strong underlying growth for both businesses is needed to justify the transaction,” the Sydney-based analysts wrote in a note.
To be sure, Trevor Allinson, an analyst at New York-based Wolfe Research, said he was “surprised the premium to acquire the company isn’t larger, as we forecast double digit Ebitda growth in each of the next three years” for AZEK.
A takeover of AZEK takes James Hardie a step further from its asbestos-tarnished past. Until the mid-1980s, the company produced goods including pipes, brake linings and insulation that contained the potentially dangerous material. As of May last year, it had paid more than A$2.2 billion to fund compensation claims, and for education and medical research, according to its website.
The AZEK purchase is designed to buy James Hardie faster revenue and earnings growth by adding a host of exterior products to bolster its offering of fiber-cement home sidings. The acquisition is also a bet on growing demand for composite materials over natural timber. On a conference call, AZEK CEO Jesse Singh said a so-called wood-conversion cycle had only just started.
On the earlier call with investors, Erter said the deal was “first and foremost about growth. We believe one plus one equals three here.” He said the agreement fulfilled all James Hardie’s requirements for an acquisition, and that he was comfortable with the premium being paid.
James Hardie expects net sales growth to accelerate by 2.5 percentage points over the next five years, while adjusted Ebitda growth will pick up by 3 percentage points.
Jack McManus, a money manager at Canopy Investors, said the recent decline in building product stocks reflects doubts about the pace of the US housing recovery, which he said may be slower than anticipated. Still, McManus said “the long-term trajectory remains positive.”
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Erter will be CEO of the combined company, and James Hardie Chief Financial Officer Rachel Wilson will also continue in her role. The boards of directors of both companies unanimously approved the transaction, which is expected to close in the second half of the year pending regulatory and shareholder approvals.
When the deal is completed, James Hardie shareholders will control about 74% of the combined company, while AZEK investors will own the remaining 26%.
Jefferies LLC is serving as lead financial advisor, and BofA Securities is acting as co-advisor to James Hardie. Goldman Sachs Group Inc. is advising AZEK.
(Adds analyst comment in 10th paragraph, closing share price.)
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