Expected to be over 30% accretive to earnings
per share on a pro forma basis
Acquisition provides HDI turnkey entry into
the home center and home builder distribution customer channels,
with high value architectural building products, established
brands, a national footprint, and leading market
positions
LANGLEY, BC, June 23, 2021 /CNW/ - Hardwoods Distribution
Inc. ("HDI" or the "Company") (TSX: HDI) today
announced that it has, through its subsidiary, entered into an
agreement (the "Equity Purchase Agreement") to purchase Novo
Building Products Holdings, LLC ("Novo") from an
affiliate of Blue Wolf Capital Partners for a total price of
US$303 million (the "Purchase
Price") (the "Acquisition"). Novo is being acquired on a
cash-free and debt-free basis other than the assumption of an
estimated US$40 million in lease
obligations. The Acquisition will be financed by a new credit
facility.
Novo is a leading U.S. distributor of architectural grade
building products to home centers and to home builder distribution
yards ("Pro Dealers") across the U.S.. Novo's product suite
includes moulding and millwork, stair systems, decorative boards,
and doors which are complementary to the Company's own
offering.
"We are very excited to be adding Novo to HDI. This highly
strategic acquisition provides a symbiotic fit with our existing
operations as a distributor of high value, specialty, non-commodity
building materials with a national footprint and leading market
position," commented Rob Brown,
HDI's President and CEO. "The acquisition advances our strategy of
growing market share and expanding our product offering and
customer channel participation in the architectural building
products industry. In addition, Novo deepens our presence in the
attractive residential and repair and remodel markets where we
expect a multi-year runway for growth. We look forward to welcoming
the talented Novo team to HDI and working together to ensure a
smooth integration planning process."
Acquisition Highlights
- Turnkey entry into the home center customer
segment. Approximately half of Novo's
revenue is derived from being a primary supplier to national and
regional home improvement retailers. Novo is a critical
product category manager for its home center customers in both
physical and digital store aisles. Services provided include
individual store planning, logistics and supply chain management,
marketing and merchandising, e-commerce, and in-store stocking and
material handling. Novo's relationships with key home center
customers span decades.
- Turnkey entry into the Pro Dealer customer
segment. Approximately half of Novo's revenue is
derived from the Pro Dealer segment. Novo has achieved preferred
vendor status with many Pro Dealers and believes there is a
significant opportunity to increase Novo's market share in this
attractive segment.
- Significantly enhances the size and scale of the Company,
with no overlap. With more than 1,400
employees and operating 14 locations with a strong eastern U.S.
presence, Novo's footprint complements that of HDI. Novo
anticipates generating annual revenues of over US$640 million and annual EBITDA of over
US$55 million in 2021.
- Skilled operational leadership team. Novo
has a committed and strong management team. Key management have
significant industry experience and will continue to lead the Novo
business as part of HDI, further adding to the Company's bench
strength.
- Accretive with further upside from expected
synergies. The Acquisition, if completed, is
expected to be over 30% accretive to earnings per share before
accounting for any synergies. Management has identified potential
synergies, including supply chain, information technology, tax and
logistics that are expected to provide further upside to the
accretion.
- Efficient use of the Company's debt
capacity. The Purchase Price will be
funded through an increase in borrowing, which in turn, is expected
to improve the efficiency of the Company's balance sheet. The
Company expects to have a pro forma bank debt to Adjusted EBITDA
after rents ratio (or "Leverage Ratio") of less than 3.0x by the
end of the year, and further expects to have significant unused
borrowing capacity available to it on close of the
Acquisition.
"Novo represents our tenth acquisition in the last five
years, and on a pro forma basis we have acquired over US$1.1 billion in annual revenues during this
time period. We continue to see significant opportunities to
complement our strong organic growth with acquisitions, and will
continue to apply our proven formula for identifying, assessing,
and integrating targeted opportunities," comment Mr. Brown.
Novo Purchase Agreement
The Company, through its subsidiary Hardwoods Specialty Products
US LP, has agreed to purchase Novo for the Purchase Price, subject
to a working capital adjustment.
The obligation of the parties to complete the Acquisition is
subject to various conditions typical of those contained in equity
purchase agreements negotiated between parties dealing at arm's
length, including that the applicable waiting period relating to
the Acquisition under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976 (including all extensions thereof) has
expired or been terminated.
The Equity Purchase Agreement contains various termination
provisions typical of those contained in equity purchase agreements
negotiated between parties dealing at arm's length, including a
provision that either party may terminate the agreement in the
event that, subject to certain conditions, the closing of the
Acquisition has not occurred by August 22,
2021.
Credit Facility
HDI has received a commitment letter from its existing lender
Bank of America, N.A. (the "Lender") for a new senior
secured credit facility (the "New Credit Facility") of up to
US$525 million. The New Credit
Facility will replace the existing credit facility for HDI's
Canadian subsidiary and the existing facility for HDI's U.S.
subsidiary. The New Credit Facility is expected to consist of
(i) a revolving credit facility of US$225
million which can be drawn upon in U.S. dollars and Canadian
dollars, (ii) a term loan of up to US$225
million, and (iii) a term loan of up to US$75 million. HDI will need to enter into the
New Credit Facility before it will be in a position to consummate
the Acquisition.
The New Credit Facility is expected to bear interest at a rate
equal to LIBOR plus up to 2.25% or the base rate of interest
charged by the Lender from time to time ("Base Rate") plus
1.0%. The LIBOR and Base Rate margins for the New Credit Facility
are expected to be subject to performance pricing adjustments, from
time to time, based on the Company's then applicable leverage
ratio.
The financial covenants under the New Credit Facility are
expected to include, among others: (i) a consolidated interest
coverage ratio (a ratio of adjusted EBITDA to total interest
expense, determined on a consolidated basis of the Company, with
the specific definitions to be agreed upon) and (ii) a consolidated
leverage ratio (a ratio of total funded debt to adjusted EBITDA,
determined on a consolidated basis of the Company, with the
specific definitions to be agreed upon).
The commitment letter and advance of the loan facilities are
subject to usual conditions including, among others, execution of
documents satisfactory to the Lender, completion of the related
transactions on terms satisfactory to the Lender, no material
adverse change in the business of the Company and its subsidiaries
or the sellers of Novo having occurred, delivery of certain interim
financial statements, pro forma financial statements and a pro
forma compliance certificate confirming compliance with financial
covenants and borrowing base on a pro forma basis, receipt of all
necessary consents for the Acquisition and completion of the
Lender's due diligence.
Conditions to Complete the Acquisition
Completion of the Acquisition is subject to a number of
conditions, including U.S. antitrust approval, as well as other
conditions customary for a transaction of this nature.
The Acquisition is expected to close in late July or early
August 2021.
Advisors
Cormark Securities Inc. is acting as financial advisors to HDI
and provided a fairness opinion to the board of directors.
Osler, Hoskin & Harcourt LLP
is acting as Canadian counsel to the Company and Stoel Rives LLP is
acting as U.S. counsel to the Company.
About Novo
Novo is a value-added distributor and manufacturer of specialty
building products. Novo supplies mouldings, stair parts, doors, and
other specialty millwork products to customers throughout
the United States and in parts of
Canada and Mexico. Novo operates out of 14 facilities,
primarily in the Eastern and Midwestern U.S., Florida and Texas. The company's divisions include Empire
Moulding & Millwork, Southwest Moulding & Millwork,
Ornamental Decorative Millwork, LJ Smith Stair Systems and Novo
Direct.
About HDI
HDI is currently one of North
America's largest distributors of non-structural
architectural grade building products to the residential, repair
and remodel, and commercial construction industries. The Company
currently operates a network in North
America of 70 distribution facilities.
Forward-Looking Statements
Certain statements in this news release may constitute
"forward-looking information" or "financial outlook" within the
meaning of applicable securities laws that involve known and
unknown risks, uncertainties and other factors that may cause
actual results, performance or achievements or industry results to
be materially different from any future results, performance or
achievements or industry results expressed or implied by such
forward-looking information and financial outlook. Forward-looking
information and financial outlook are identified by the use of
terms and phrases such as "anticipate", "believe", "could",
"estimate", "expect", "intend", "may", "plan", "predict",
"project", "will", "would", and similar terms and phrases,
including references to assumptions. Such information may involve,
but is not limited to, comments with respect to strategies,
expectations, planned operations or future actions. Forward-looking
information in this news release includes, without limitation,
statements with respect to: the anticipated closing of the
Acquisition, the terms thereof and the timing therefor; the
expected multi-year runway for growth in the residential and repair
and remodel markets; HDI belief there is a significant
opportunity to increase Novo's market share in the Pro Dealer
segment; Novo's expected annual revenues and annual EBITDA; key
management of Novo will remain in place, further adding to the
Company's bench strength; the expected accretion to cash
flows and earnings resulting from the Acquisition;
management has identified potential synergies, including supply
chain, information technology, tax and logistics that are expected
to provide further upside to the accretion; the increase in
borrowing is expected to improve the efficiency of the Company's
balance sheet; management's expectations for pro forma Leverage
Ratio and further expects to have significant unused borrowing
capacity available to it on close of the Acquisition; and, the
anticipated entering into of the New Credit Facility and the terms
thereof and timing therefor. Actual events or results
may differ materially.
The forecasts and projections that make up the
forward-looking information and financial outlook in this news
release are based on assumptions which include, but are not limited
to: the satisfactory timing and receipt of regulatory approval with
respect to the Acquisition; the completion of the Acquisition; the
Company realizing the expected benefits and synergies of the
Acquisition; no undisclosed liabilities associated with the
Acquisition; no material adverse changes occur in respect of the
acquired assets before the completion of the Acquisition;
the Company completes the New Credit Facility in accordance with
the terms currently contemplated; the Company can comply with the
restrictive conditions required by the New Credit Facility; the
financial impact of the Acquisition is as currently expected by
management; the Company and Novo do not lose any key personnel;
there are no decreases in the supply of, demand for, or market
values of products that harm the Company or Novo's business; the
Company does not incur material losses related to credit provided
to its customers; the Company is able to sustain its level of sales
and earnings margins; the Company is able to grow its business long
term and to manage its growth; the Company is able to integrate
acquired businesses, including Novo; there is no new competition in
the markets in which the Company operates that lead to reduced
sales and profitability; the Company can comply with existing
regulations and will not become subject to more stringent
regulations; no material product liability claims; importation of
products manufactured with hardwood lumber or sheet goods does not
increase and replace products manufactured in North America; the Company's management
information systems upon which it is dependent are not impaired;
the Company is not adversely impacted by disruptive technologies;
an outbreak or escalation of a contagious disease does not
adversely affect the Company's business; and, the Company's
insurance is sufficient to cover losses that may occur as a result
of its operations.
The forward-looking information and financial outlook in this
news release is subject to risks, uncertainties and other factors
that could cause actual results to differ materially from
historical results or results anticipated by the forward-looking
information. The factors which could cause results to differ from
current expectations include, but are not limited to: failure
to close the Acquisition; the actual impacts of the Acquisition on
the Company's earnings per share, free cash
flow and Leverage Ratio may not be in line with
management's expectations; the
Company may not be able to reduce its
leverage levels by the amount or at the time desired, or at all;
the Acquisition may not be immediately accretive to earnings per
share; potential undisclosed liabilities associated with the
Acquisition; no control by the
Company over Novo until completion of the
Acquisition; the Company may not be able
to obtain the New Credit Facility on the terms currently expected,
or at all; the New Credit Facility will be subject to certain
restrictive conditions that limit the discretion of management;
exchange rate fluctuations between the Canadian and US dollar could
affect the Company's performance; the Company's results are
dependent upon the general state of the economy; the Company
depends on key personnel, the loss of which could harm its
business; decreases in the supply of, demand for, or market values
of hardwood lumber or sheet goods could harm the Company's
business; the Company may incur losses related to credit provided
to the Company's customers; the Company's products may be subject
to negative trade outcomes; the Company may not be able to sustain
its current level of sales or earnings margins; the Company may be
unable to grow its business long term or to manage any growth; the
Company may be unable to integrate acquired businesses; competition
in the Company's markets may lead to reduced sales and
profitability; the Company may fail to comply with existing
regulations or become subject to more stringent regulations;
product liability claims could affect the Company's sales,
profitability and reputation; importation of products manufactured
with hardwood lumber or sheet goods may increase, and replace
products manufactured in North
America; disruptive technologies could lead to reduced
revenues or a change in our business model; the Company is
dependent upon its management information systems; the Company's
insurance may be insufficient to cover losses that may occur as a
result of the Company's operations; an outbreak or escalation of a
contagious disease may adversely affect the Company's business;
and, the Company's credit facilities affect its liquidity, contain
restrictions on the Company's ability to borrow funds, and impose
restrictions on distributions that can be made by certain
subsidiaries of the Company. More information about the risks and
uncertainties affecting HDI's business can be found in the "Risk
Factors" section of its Annual Information Form dated March 11, 2021 which is available under the HDI's
profile on SEDAR at www.sedar.com.
To the extent any forward-looking information or statements
in this news release constitute a "financial outlook" within the
meaning of securities laws, such information is being provided to
demonstrate the potential benefits of the Acquisition and
management's estimate of the future financial performance of Novo,
and readers are cautioned that this information may not be
appropriate for any other purpose and that they should not place
undue reliance on such information.
Although HDI has attempted to identify factors that would
cause actual actions, events or results to differ materially from
those disclosed in the forward-looking statements or information or
financial outlook in this news release, there may be other factors
that cause actions, events or results not to be as anticipated,
estimated or intended. Also, many of the factors are beyond the
control of HDI. Accordingly, readers should not place undue
reliance on forward-looking statements or information in this news
release. The forward-looking information is made as of the date of
this news release, and HDI assumes no obligation to publicly update
or revise such forward-looking information to reflect new
information, subsequent or otherwise, except as may be required by
applicable securities law. The forward-looking information
contained herein is expressly qualified in its entirety by this
cautionary statement.
Non-IFRS and Non-U.S. GAAP Financial Measures
This news release makes reference to certain non-IFRS
financial measures, in the case of the Company, or non-U.S. GAAP
financial measures, in the case of Novo. These non-IFRS and
non-U.S. GAAP financial measures are not recognized measures under
IFRS and U.S. GAAP, as applicable, do not have a standardized
meaning prescribed by IFRS or U.S. GAAP, as applicable, and are
therefore unlikely to be comparable to similar measures presented
by other publicly traded companies, and should not be construed as
an alternative to other financial measures determined in accordance
with IFRS and U.S. GAAP, as applicable. Rather, these financial
measures are provided as additional information to complement IFRS
and U.S. GAAP financial measures by providing further understanding
of operations from management's perspective. Accordingly, non-IFRS
and non-U.S. GAAP financial measures should never be considered in
isolation nor as a substitute to using net income as a measure of
profitability or as an alternative to the IFRS consolidated
statements of income or other IFRS or U.S. GAAP statements.
Management presents non-IFRS and non-U.S. GAAP financial measures,
specifically EBITDA and Adjusted EBITDA as it believes these
supplementary disclosures provide useful additional information
related to the operating results and financial condition of the
Company and Novo and uses these measures of financial performance
and financial condition as a supplement to the consolidated
statements of income and statements of financial position of the
Company and Novo.
The definitions of the non-IFRS and non-U.S. GAAP measures
contained in this news release are as follows: (i) "EBITDA", as it
relates to Novo, means earnings before interest, taxes,
depreciation and amortization; and (ii) "Adjusted EBITDA" , as
it relates to HDI, means earnings before interest, taxes,
depreciation and amortization with adjustments for transaction
expenses and non-cash long term incentive
compensation.
SOURCE Hardwoods Distribution Inc.
