UPDATE: BFS Shares Rise on News, Analysts Critique the Deal

Builders FirstSource (BFS) announced April 13 it will acquire ProBuild in an all-cash deal worth $1.63 billion. The acquisition will create America's biggest pro-oriented building material supplier with operations from Florida to Alaska.

The deal signals the end of one dream and the expansion of another. ProBuild was created a decade ago out of the mergers and acquisitions of scores of smaller companies with the intention of serving national builders who wanted a one-stop shop. It grew to be at one point America's biggest LBM operation, and last year recorded sales of roughly $4.5 billion; it stands at No. 2 on the current ProSales 100 list. But it never achieved the synergies and market dominance that was envisioned. Over the years, ProBuild's owner--Devonshire Investors, a private-equity firm associated with Fidelity Investments’ parent, FMR LLC--is believed to recorded hundreds of millions of dollars' worth of losses.

BFS also was created out of M&A work by the private equity funds JLL Partners andWarburg Pincus. which continue to control the company. BFS also appeals to bigger builders, but until today its focus has been in the Southeast. It ranks No. 6 on the ProSales 100 with sales of roughly $1.6 billion last year. And it was only last year that it turned a net profit, generating $18.2 million.

The combined company will operate in 40 states and serve 24 of the top 25 metropolitan statistical areas, BFS' announcement said.  Synergies from combining Dallas-based BFS and Denver-based ProBuild will generate $100 to $120 million a year in the first two years, BFS said. It envisioned the deal will incur one-time costs of $90 million to $100 million.

BFS' Floyd Sherman will serve as chief executive officer of the combined company while BFS' Chad Crow-, the company's current president, will serve as chief financial officer, a position he held at BFS until recently. ProBuild CEO Robert Marchbank "will continue as part of the ProBuild leadership team to support integration planning and ensure a smooth transition."

BFS pushed hard in its announcement to tout the advantages of what Sherman called "a compelling combination."

"Together, Builders FirstSource and ProBuild will have an enhanced portfolio of products with increased breadth and depth within its categories, including lumber, windows, doors, millwork, hardware, roof and floor trusses, engineered wood products, gypsum, roofing, metal and concrete products, cabinets and countertops," BFS said. "In addition, the combined company will better serve its customer base through its broader scale and operating footprint, enabling it to deliver products and services more effectively and efficiently."

BFS said the transaction could propel more sales to production and custom builders as well as the multi-family/commercial and remodeling markets. BFS "brings to ProBuild significant sales expertise in value-added products," it said, while offers an "attractive customer mix."

As for its financials, the combined company had pro forma net debt of $2.1 billion as of Dec. 31, including lease obligations. "[This] which implies a multiple of 5.6x net debt / adjusted EBITDA, after giving effect to $110 million of annual run-rate cost-savings synergies, the midpoint of the expected range," BFS said. "The combined company is expected to generate significant cash flow that will allow it to delever following the close of the transaction. This delevering will be driven primarily through cost savings realization, earnings expansion, and strong free cash flow generation from operations, further enhanced by the recovering housing sector and the utilization of tax assets."

ProSales first reported on Dec. 15. that Devonshire Investors has hired Credit Suisse to create documents regarding a potential sales of ProBuild. Devonshire provided the bulk of the funding and much of the vision that led to the creation of ProBuild in 2006 by merging the Strober Organization--a New Jersey-based dealer it had acquired in 1997--with the Seattle area's Lanoga Corp. The newly created, Denver-based ProBuild finished that year with $6 billion in sales, 506 facilities from Florida to Alaska, and 17,000 employees.

Then the housing crash came and overwhelmed the company, nearly halving its revenues in just three years. It is believed to have posted many hundreds of millions of dollars of losses over the years, but the exact amount of those losses isn't known publicly. One of the few glimpses into the company's finances came in November 2009, when ProBuild confirmed a Reuters report that said Devonshire had spent $345 million just to cover six months' worth of losses at the dealer and might have to pay another $105 million through January 2010 to buttress the operation.

BFS' statement today that ProBuild had sales in 2014 of $4.5 billion suggests that revenues rose 4.7% at the company last year; ProBuild reported $4.3 billion in 2013 revenue in last year's ProSales 100 report. It had 414 locations and just over 10,000 employees at the start of last year.

BFS operates 56 distribution centers and 56 manufacturing facilities in nine states from Texas to Maryland. That's about 12 more than it had at the start of 2014, as the company has made a number of acquisitions, particularly in Texas and particularly in manufacturing operations. It had $1.49 billion in revenue in 2013 and roughly 3,300 employees.

While BFS touted the expansive footprint of a combined BFS-ProBuild operation, there was wide speculation among LBM leaders and investors that ProBuild would be carved up once it got swallowed whole. Among the candidates are the company's more retail-oriented Dixieline stores in the San Diego operation, its intensely independent-mined Spenard Builders Supply yards in Alaska, and an extensive collection of facilities in the Upper Midwest that came to ProBuild's predecessors when they acquired United Building Centers.

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