Brickworks Limited (ASX: BKW) has announced that it is going to acquire the US' fourth-largest brick manufacturer Glen-Gary for $151 million, or US$110 million, which will be funded by debt.
Brickworks is one of Australia's largest construction businesses. It is involved in the manufacture and distribution of clay and concrete products, property development and realisation, and investments. Its main investment is a large stake in Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
Glen-Gery has leading market positions in the Midwest, Northeast and Mid-Atlantic states. It sells around 230 million US bricks per year and has 10 manufacturing plants.
Earnings before interest, tax, depreciation and amortisation (EBITDA) the 12 months to August 2018 was $18 million on sales of $162 million. Management expect the acquisition to provide low single-digit normalised earnings per share (EPS) accretion in the first full year of operation.
Brickworks said it was an attractive acquisition because it provides exposure to a large, attractive market with strong demand drivers.
Brickworks also said it has the ability to add value through investment and leveraging operational expertise. Management said that it can share best products, intellectual property and best practices between Australia and the US. It can also leverage existing relationships to introduce premium imported products to the US.
The acquisition provides Brickworks with significant long-term growth opportunities. The US brick market is approximately three times larger than the Australian market. The US brick industry is highly fragmented according to Brickworks – around 37 manufacturers compared to five in Australia.
Brickworks Managing Director Lindsay Partridge said "The acquisition of Glen-Gery represents a significant milestone in the history of Brickworks. We believe the transaction provides an ideal entry into the US market, with Glen-Gery having established a leading market position in the key North-Eastern region, a reputation for premium products and high exposure to the architectural market."
Foolish takeaway
Brickworks is trading at 16x FY20's estimated earnings with a grossed-up dividend yield of 5.2%. Whilst this acquisition is seemingly expensive, I think it seems very compelling for Brickworks for the long-term.
The diversity of earnings now makes Brickworks looks more attractive to me and I may buy it at some point in the future, particularly if an Australian construction downturn hurts the share price.
