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Brickworks share price surges higher on latest US acquisition

The Brickworks Limited (ASX: BKW) share price has surged higher today following the announcement of its latest American acquisition. Brickworks shares closed up 3% this afternoon to $18.57 as the brickmaker’s North American growth strategy gathers pace. 

As announced this morning, Brickworks has entered into a binding agreement to acquire Redland Brick Inc for up to A$70 million. 

Under the terms of the deal Brickworks will acquire 4 modern manufacturing sites located across Maryland, Pennsylvania, and Virginia. The acquisition is expected to provide a quicker and more cost-effective route to achieving a modern network of manufacturing plants than building a new plant. 

The Redland Brick plants have a total capacity of 250 million bricks per year across a range of mounded and extruded face brick, pavers and thin brick for the architectural and residential markets. Redland Brick currently sells around 80 million bricks per year under several brands with a strong reputation for premium architectural products. 

The deal is expected to deliver 3% earnings per share accretion within 3 years once identified cost synergies are realised. The purchase price consists of a US$35 million upfront payment with up to US$13 million in deferred payments, subject to certain conditions being met. The deal is expect to close in February 2020. 

Brickworks is Australia’s largest brick manufacturer and has been pursuing an aggressive expansion into the United States. In August, Brickworks purchased Iowa brickmaker Sioux City Brick, following the purchase of Glen-Gery, America’s fourth largest brickmaker, in November 2018. 

Shares in Brickworks fell sharply following the announcement of the Glen-Gery acquisition, down 11% to $14.99 on 23 November 2018 from $16.90 on 15 November. At the time, Brickworks explained to the Australian Financial Review that it had no choice but to pursue growth overseas. Brickworks market power in Australia meant it couldn’t legally grow its business by more than half. As Managing Director Mr Lindsay Partridge said, “we’re good at making bricks so we have to go overseas.”

The latest acquisition will support Brickworks growth strategy in North America by delivering the opportunity to optimise production with existing facilities and deliver manufacturing cost savings. Brickworks’ leadership position in the northeast United States should be enhanced with the addition of several well-established brands, while administrative and overhead synergies are realised.  

Brickworks Managing Director Mr Lindsay Partridge commented:

These acquisitions follow a thorough strategic review, where the North American brick industry was identified as a highly attractive long-term growth opportunity for Brockworks. This strategy is underpinned by the significant value creation opportunities available through consolidation and rationalization of underutilized facilities across the industry.

Brickworks shares have risen more than 11% this year from $16.56 in January to $18.57 at market close today. Total revenue was up 17% in FY19 to $919 million, with dividends up to 57 cents per share from 54 cents per share in FY18.

Foolish takeaway

Brickworks is on an American acquisition spree as part of its growth strategy. With limited opportunities for Australian growth, Brickworks must seek opportunities to expand offshore and the company has chosen the North American market to spur its growth. 

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Brickworks. 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.

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