Oldcastle-style capital reallocation

Dublin-based CRH Plc entered the U.S. nearly 40 years ago, a deal for Idaho’s Amcor Precast seeding a broad, deep portfolio under the Oldcastle Inc. banner. Now designated Americas Products and Americas Materials in the CRH group, the Oldcastle Architectural, Materials and Precast businesses have long since grown to command top or top five U.S. market positions in block & paver, packaged dry mix and raw materials, ready mixed concrete, aggregates, and drainage- or utility-centered precast products and structures.

Through more than three decades of market development, Oldcastle differentiated itself from other multinational-backed companies by keeping nearly every asset inherited in a perpetual slew of acquisitions. While peer operators might buy and break up certain businesses, Oldcastle held onto acquired properties—even when deals brought stakes in market segments where it would be a limited player.

The recent exit of clay brick and concrete roof tile operations indicated the company has changed its tune. CRH is now set to dispatch a business representing 16 percent of Oldcastle’s $15 billion-plus in annual revenue. Late last month it announced an agreement to sell the Allied Building Products-anchored Americas Distribution business for $2.6 billion to Beacon Roofing Supply Inc., Herndon, Va. East Rutherford, N.J.-based Allied distributes roofing, siding, windows, doors, wallboard, and suspended ceiling systems across 208 locations in 31 states. It positions Beacon Roofing, North America’s largest publicly traded wholesale roofing and building materials distributor, with annual sales upward of $7 billion, plus 593 branches in all 50 states and six Canadian provinces.

Referencing Allied-Beacon and the concurrent acquisition of a German lime producer, CRH Chief Executive Albert Manifold observed, “These transactions demonstrate the strategy of adding value through the efficient allocation and reallocation of capital, and in particular deployment of capital into an attractive growth market in Europe—while maintaining our financial discipline.”

CRH acquired Allied in 1996 amid a surge of deals expanding the Oldcastle Architectural, Products and Materials divisions, and effected a growth strategy in roofing, siding, window and interior building commodity distribution around bolt-on deals, selective greenfield developments, and private label offerings. “While the business has delivered significant improvement in performance and returns in recent years, the absence of value accretive acquisition opportunities and a lack of visibility as regards a route to market leadership, has resulted in [the] decision to divest this business now at an attractive valuation,” CRH noted in the Allied-Beacon announcement. “Proceeds will be reallocated to value creating acquisitions and investments.”

Deals would appear likely on both sides of the Atlantic; those boosting U.S. and Canadian operations should have priority. Oldcastle Materials, which earlier this year saw one of its largest bolt-on acquisitions of late—Mulzer Crushed Stone of Indiana—is the most profitable CRH division. In 2016, it accounted for 28 percent of revenues and 40 percent of operating profit. The Americas Products businesses, including Architectural and Precast, are likewise solid performers, accounting for nearly 16 percent of CRH revenue and 20 percent of operating profit last year. By comparison, Americas Distribution represented 8 percent and 2.8 percent of 2016 revenue and operating profit.

Margins in roofing, siding, window and drywall distribution are no match for the returns that CRH, through the Oldcastle brand of market leadership and pricing discipline, enjoys in aggregates, ready mixed and manufactured concrete.