Reece Ltd announces new $2 billion acquisition

Bathroom and plumbing equipment company Reece Ltd (ASX: REH) just announced a $1.9 billion acquisition.

The target is MORSCO Inc., a leading South-Western US distributor of plumbing, waterworks, heating and cooling products.

Acquisition financing

To fund the transaction, Reece launched a $560 million equity raising at $9.30 per share, a 13.5% discount on the last traded price of $10.75.  The Wilson family – which runs Reece and owns a majority stake in the business – will contribute to the deal with a $300 million subscription.

The results of the equity raising will be announced on Wednesday. Until then, the stock will remain in a trading halt.

The rest of the purchase price will be covered with a US$1,140 million seven-year senior secured credit facility from the US institutional term loan market – an arrangement that offers long-term financing without imposing maintenance covenants. For the acquisition, Reece has a pro-forma net debt to EBITDA ratio of 2.9 at December 31.

Strategy and impact

Reece is betting on a favourable outlook for the US construction sector, particularly in the Sun Belt, a group of Southern US states that are expected to generate strong economic and demographic growth.

MORSCO operates in 16 states, with 171 branches and 2,500 employees. In 2017, it reported sales of US$1.7 billion and EBITDA of US$100 million. The acquisition is expected to be mid-high single digit EPS accretive in the first year of ownership, assuming no synergies.

In fact, Reece plans to run MORSCO as a separate business, maintaining the current management in place.

Aside from the acquisition, the company forecasts a record result in FY2018 thanks to new branch openings and the upgrade of both its branch network and online offer. Sales will be up 10% on the previous year, in a range of $2.65 billion to $2.70 billion. NPAT will increase 5% to 8%, to a range of $223 million to $230 million.

Foolish takeaway

Taking into account the issuance of new shares and the upper end of the earnings forecast, Reece has a PE ratio of around 26, which is not necessarily too much for a company with its recent history of steady growth and good future prospects. However, I would consider also investing in industry peer GWA Group Ltd (ASX: GWA), which trades at around 18x forward earnings on solid fundamentals.

You may also want to read about three blue chip stocks with growing profits and dividends. Just click the link below to get your free report.

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Tommaso Autorino has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.