Kingspan boss Gene Murtagh opened up a new front for growth early last year when he agreed to write a €550 million cheque – a record for the group – to buy Ondura, a French player in roofing and waterproofing of commercial buildings.
He quickly followed up with the purchase of Belgian peer Derbigum for €95 million and set up a new roofing and waterproofing division with annual sales running at €500 million.
It’s tiny in the scheme of things for a group with total revenues running at about €8.3 billion. However, last November Murtagh inserted a line into a trading statement saying that while the new unit was mainly European, “our ambition, and the opportunity, is global”.
Investors got a clear sense of the scale of that ambition last weekend, when it was reported – and subsequently confirmed – that Kingspan had held informal talks with Arizona-based Carlisle Companies, a specialist in roofing and weatherproofing.
Carlisle’s market value stood at almost $13 billion (€12.2 billion) last Friday, before news of the talks emerged. That compared with Kingspan’s €14.3 billion market capitalisation at the time. The tentative discussions are said to have fallen through over the price of a deal.
Kingspan issued a statement on Wednesday saying that it has “admired Carlisle for many years and, recognising the clear strategic fit, had recent and informal discussions on a potential transaction”. While it said that there is currently no active engagement, the North American “roofing space remains a key area of interest”, it said. It’s not like the door is entirely shut.
Barclays analyst Pierre Rousseau said a tie-up between the two would have been attractive to Kingspan both from a product and geographic point of view.
Only 22 per cent of the company’s revenue came from the Americas last year. Kingspan reported last month that the Americas, especially the United States, proved to be a strong spot in the first half of this year, even as Europe was more mixed with high interest rates weighing on construction and refurbishment.
Kingspan’s interest in roofing and waterproofing is mainly threefold. First, it is a growth area in itself, especially in the US, where it is seen as benefiting from president Joe Biden’s $400 billion Inflation Reduction Act, primarily aimed at decarbonising the world’s largest economy.
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Getting into roofing and waterproofing also allows Kingspan to cross-sell the insulation that goes directly underneath. The group estimates that 90 per cent of commercial roofing sold in North America is flogged as a bundle, with insulation. In Europe, it’s more likely 10 per cent.
Third, securing a contract to provide the outer layer of a building would put Kingspan in a good position to pitch the likes of its insulation, flooring, solar PV, skylight domes and water harvesting solutions elsewhere on the project.
Still, the financial discipline of Kingspan to walk away from Carlisle is to be welcomed, according to Goodbody Stockbrokers analyst David O’Brien.
It is not the first time the Irish group has looked at a US roofing materials deal, before backing away. In late 2020, it pulled out of the running for tyre maker Bridgestone’s Firestone Building Products business, a leading US commercial roofing and building envelope solutions group, when the bidding got a bit too rich. The business ended up being acquired by Holcim, the Swiss cement giant, for $3.4 billion.
Kingspan also had an early look last year at US roofing systems group Duro-Last, when the company was on the block. It too was snapped up by Holcim in February – for almost $1.3 billion.
Murtagh told analysts in February that the size of the Duro-Last deal was “not remotely too large for us ... we were at the table”. However, the earnings multiple of the deal – at 11.9 times earnings before interest, tax, depreciation and amortisation (ebitda) – “was way out of anything we’d be prepared to pay, which is a different issue than the absolute figure”.
But with dealmaking in this segment of the building materials market running hot right now in the US, can Murtagh maintain financial restraint and still bag a deal?
Barclays’ Rousseau reckons a transaction the size of Carlisle would have required “capital engineering”. But it’s most likely that Kingspan eyed a share-based tie-up along the lines of cardboard box maker Smurfit Kappa’s agreement this week to buy US rival WestRock for $11.2 billion. Murtagh’s father, Kingspan founder Eugene Murtagh is the main shareholder in the group, at about 15 per cent, and would see his stake diluted in any such transaction.
Meanwhile, the Cavan company brought the focus back to Europe on Wednesday when it revealed that it had increased its stake in Stockholm-listed Nordic Waterproofing from 24 per cent to above the 30 per cent that requires it, under Swedish takeover rules, to launch a takeover bid for the rest of the business.
Kingspan plans to make an offer for the remaining stock soon – priced at a same level at which it purchased shares this week, which marked an almost 14 per cent premium to Wednesday’s closing price.
“It always seemed inevitable that, once Kingspan took a stake in Nordic Waterproofing, it would ultimately seek to take full ownership of the business,” said Davy analyst Flor O’Donoghue. The deal prices the company’s equity at about €320 million and puts an enterprise value on the business of about 10 times ebitda.
It also almost doubles Kingspan’s roofing and waterproofing annual revenue to close to the €1 billion mark.
“We think it’s still early days in the expansion into this category and ultimately the key to value creation will be a successful integration with the existing insulation businesses,” said UBS analyst Gregor Kuglitsch.
But while it continues to scout for deals in the US, the real opportunity for Kingspan in Europe, for now, has to lie in trying to get roofing and insulation bundling up to levels seen on the other side of the Atlantic.
