Story Stocks^®

There is some big M&A news in the building products space. James Hardie (JHX -19%), an Australian-based supplier of fiber cement and fiber gypsum building products, announced it will acquire The AZEK Company (AZEK +12%), a supplier of decking and railing products. It is a cash-and-stock deal valued at $8.75 bln and should close in 2H25. AZEK shareholders will receive $26.45 in cash plus 1.034 shares of JHX, or $56.88 based on Friday's close. That's a 37% premium for AZEK shareholders.

• The two companies operate in different categories, but the goal is to bring together highly complementary products that span siding, exterior trim, decking, railing and pergolas. JHX makes the argument that consumers are often looking for siding and decking at the same time, so it creates a one-stop shop for contractors.
• JHX sees at least $500 mln in commercial synergies. There should be significant cross-sell opportunities within each company's contractor network and customer base. Also, the combined company will be able to offer a wider selection of complementary products and a national footprint across North America. In fact, JHX believes there could be meaningful upside to its commercial synergies forecast. Another key rationale is that JHX sees the transaction as perhaps spurring a valuation uplift.
• JHX has had anemic top line growth in recent quarters. However, JHX notes that AZEK has averaged more than 15% sales growth in its residential segment over the last seven years. This should help boost James Hardie's top-line growth trajectory. After the combination, JHX expects its annual sales and adjusted EBITDA growth rates will accelerate by more than 250 bps and 300 bps, respectively.
• Also, once run-rate cost synergies are achieved, the combined company is expected to generate annual free cash flow of greater than $1 bln, which James Hardie intends to use to support organic growth, deleverage and fund ongoing share repurchases. James Hardie plans to repurchase $500 mln of its shares in the 12 months after closing. At the same time, James Hardie is targeting a leverage ratio below 2.0x net debt to LTM adjusted EBITDA by the end of the second full fiscal year after closing.

Overall, we see this as a good fit. At first, we did not see a lot of overlap between their product categories, but we are buying into the argument that consumers tend to buy siding and decking at the same time. Also, when an industry is struggling, it makes sense to get bigger to ride out the downturn. The AZEK premium looks attractive for AZEK shareholders although JHX is trading sharply lower on the news as investors are likely recoiling at the premium being paid. On a final note, AZEK peer Trex (TREX +5%) is trading nicely higher on the news.