Headwaters' Twin Acquisitions


Headwaters Incorporated (HW) has entered into an agreement to acquire an 80% equity interest in the business of Roof Tile, Inc. The company is also set to acquire a 40% equity interest in the joint venture (:JV) to market Tag & Stick.

Roof Tile, Inc. is a leading manufacturer of high quality concrete roof tiles and accessories. Its products are sold under the Entegra brand mainly in Florida, which is the third fastest growing state in the U.S. in terms of population.

On the other hand, the JV to promote Tag & Stick will be controlled by majority shareholders of Roof Tile. Tag & Stick is an innovative technology in roofing underlayment. Tag & Stick is presently sold in Florida and will soon be available to the customers of Headwaters.

The acquisitions will help Headwaters in increasing its additional sales and distribution networks in the building products market in Florida. It will also allow sales growth on a geographical basis.

In addition, Headwaters believes that the acquisitions will contribute to margin expansion in 2014. The company had 16.5% adjusted earnings before interest, taxes, depreciation and amortization (:EBITDA) margins in fiscal 2013.

Separately, Headwaters also announced its intention to offer $150 million worth of senior unsecured notes due 2019. The notes will be guaranteed by some existing and future domestic subsidiaries of Headwaters.

Headwaters will use the net proceeds from the offering for the acquisitions. Any additional proceeds will be used to fund future acquisitions and pay the related transaction fees and expenses, as well as for general corporate purposes including capital expenditures and repayment of indebtedness.

Subject to customary closing conditions, the acquisitions are expected to consummate on Dec 2013. However, financial terms of both the transactions were not disclosed yet.

Headwaters reported fourth-quarter fiscal 2013 (ended Sep 30, 2013) adjusted earnings of 29 cents per share, up 16% year over year. The results were ahead of the Zacks Consensus Estimate of 23 cents.

For fiscal 2014, Headwaters anticipates adjusted EBITDA in the range of $125 million to $140 million. The company is optimistic that revenues will improve riding on growth in new housing markets.

The company also projected expansion of adjusted EBITDA margins in both the Light Building Products and the Heavy Construction Materials segments due to higher stone sales. However, cost inflation may act as headwinds in future.

South Jordan, Utah-based Headwaters is a diversified growth company providing building products, technologies and services to the heavy construction materials, light building products, and energy technology industries.

Headwaters currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the same industry are CaesarStone Sdot-Yam Ltd. (CSTE), James Hardie Industries plc (JHX) and Simpson Manufacturing Co., Inc. (SSD). While CaesarStone and James Hardie carry a Zacks Rank #1 (Strong Buy), Simpson holds a Zacks Rank #2 (Buy).

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