Shares in James Hardie (ASX: JHX) were down around 14% on Monday after the market struggled to make sense of revelations it has entered one of the biggest ASX-listed deals in three years.
The global building products giant is buying US-listed Azek (NYSE: AZEK) – including the company’s net debt of around US$386 million - in a cash scrip deal for US$8.74 billion (A$13.87 billion).
Given that it was initially flagged late last year, today’s announced takeover of the high-performance, low-maintenance and environmentally sustainable outdoor living products manufacturer should not have come as a complete surprise to the market.
The merger of James Hardie and Azek is expected to create a leading exterior and outdoor living building products growth platform which brings together highly complementary products spanning siding, exterior trim, decking, railing and pergolas.
The details
Under the agreement, Azek shareholders will receive US$26.45 in cash and 1.0340 ordinary shares of James Hardie to be listed on the NYSE for every share of Azek common stock they own.
Based on the closing price of $46.80 per share of James Hardie CDIs on the ASX last Friday, the stock and cash consideration represents a total per share value of US$56.88.
Today’s deal represents a 26% premium to Azek’s volume-weighted average price (VWAP) over the 30 trading days prior to 21 March 2025 and a 21% premium to Azek’s VWAP over the 60 trading days prior to March 21, 2025.
Following its listing on the NYSE, James Hardie’s ordinary shares are expected to be eligible for broader index inclusion the U.S. going forward.
James Hardie's and Azek's boards have unanimously approval the deal and, subject to Azek shareholder approval, it is expected to close during 2H FY25.
On completion of the transaction, James Hardie and Azek shareholders will own around 74% and 26% of the combined company respectively.
Cash accretive
The deal is expected to be cash earnings accretive during the first full fiscal year and generate US$350 million-plus additional earnings once synergies are fully realised.
The company has identified no less than US$125 million and US$500 million in cost and commercial synergies respectively.
Commenting on today’s announcement, James Hardie CEO Aaron Erter told investors that uniting two companies with large material conversion opportunities would expanded the company’s addressable market in North America to US$23 billion.
“Together, we will be well positioned to drive sustained above market growth as a leader across attractive categories for the exterior home,” said Erter.
James Hardie has reaffirmed its FY25 guidance of adjusted net income of at last US$635 million and capita expenditure of US$420 million.
But looking forward, the company expects annual growth rates of net sales and adjusted earnings to accelerate by more than 250 basis points and 300 basis points respectively, over the next five years.
$1 billion-plus free cash flow
In the 12-month period ended December 31, 2024, James Hardie and Azek generated $5.9 billion in net sales, more than $1.8 billion in adjusted earnings and an adjusted earnings margin of 31%, on a combined company basis and including the total expected run-rate benefit of synergies.
Once run-rate cost synergies are achieved, the combined company is expected to generate robust annual free cash flow of greater than $1 billion.
James Hardie has flagged plans to use this cash flow to support organic growth, deleverage and fund ongoing share repurchases.
Once the purchase of Azek is complete, the company plans to buy back $500 million of shares over the ensuing 12 months.
Given that James Hardie share price took a sizable tumble on 18 March, some brokers see this dip as an opportune time to invest in this cyclical stock on a three to five year horizon.
James Hardie’s market capitalisation is A$18 billion making it the 32nd largest stock on the ASX; the share price is down 30% on year and down 16% year to date.
The stocks shares appear to be in a near-term downtrend confirmed by its 20-day moving average.
The market consensus recommendation is a moderate buy.