The pirates take James Hardie

Shock has turned to fury among the large Australian shareholders of building products giant James Hardie, which last Monday announced the acquisition, on unfathomable terms, of Chicago decking company AZEK. 

Two-thirds if not four-fifths of public company acquisitions are value destructive, and this one adheres strictly to the formula. Hardie's old staple asbestos was a fireproof material but the same certainly can't be said for its shareholders' highly flammable funds today. 

Keep in mind that Hardie is one of the best-quality cyclicals listed on the ASX, having taken 23 per cent share of the US siding market and generating a return on capital consistently north of 40 per cent.[[There is no small irony in the fact that James Hardie, the dominant player in fibre cement, fought to its position of strength in the US siding market by disrupting its competitors in vinyl cladding only to blow itself up buying AZEK, a PVC deck-maker.]] It's a beautiful business and it's been very well run for the past 20 years. Unsurprisingly then, there's a throng of quality local funds on the register: Ausbil, AustralianSuper, Bennelong, First Sentier, Greencape, Hyperion and WaveStone, to name a few. 

James Hardie CEO Aaron Erter had been warming these shareholders up to a bolt-on acquisition – something adjacent; nothing big. You can imagine their horror, then, to learn that Hardie (equity value: US$13 billion) is blowing its brains out, paying US$9 billion for AZEK. Worse, Hardie is using its stock (at a price-earnings multiple of 17) to pay a 37 per cent premium for an inferior company trading at 25 times earnings. AZEK shareholders are also receiving US$3.8 billion in Hardie's cash when Hardie makes between two and three times more on each dollar invested (in itself) than AZEK does.[[James Hardie reports a five-year average return on capital employed (ROCE) of 45 per cent. Comparing apples with apples (using Visible Alpha's definition of pre-tax return on invested capital), James Hardie's ROIC was 31 per cent in FY24 (versus 15 per cent for AZEK), 23 per cent in FY23 (versus 8 per cent for AZEK) and 26 per cent in FY22 (versus 10 per cent for AZEK).]]

To get around those iron realities, the acquisition case is necessarily spurious. Hardie's investment bankers at Jefferies (or was it AZEK's at Goldmans Sachs?) have obviously given ChatGPT a workout – and we're talking the free version.

Erter is promising "at least" US$350 million in synergies after five years. Ordinarily, when you make an adjacent acquisition you unlock synergies by pulling out costs – by eliminating duplicate roles, merging software and improving purchasing power. This deal is extremely light on that. Instead, the synergies are mostly “revenue synergies”. This is a non-phrase, mind you, or at least a non-concept. You won't find it in IFRS rules. It's not a GAAP term. It's an expression only investment bankers would wield and it's supposed to mean extracting more money from the same customers. Either they'll sell them more shit or they'll sell them the same shit at higher prices, they just can't tell us which.