James Hardie is buying Azek! Here’s what this A$14bn merger means

The biggest news on the ASX yesterday was that James Hardie is buying Azek for US$8.8bn/A$14bn. To say it is a peculiar move is an understatement, because it represents significant diversification and could even mark a change in direction.

James Hardie (ASX:JHX) has a shameful past where it made building composite known as fibro-cement, which used asbestos fibres to reinforce cement sheets in a period of several decades that came to an end when the health impacts of asbestos became known. Its bread and butter today is selling wall cladding and plasterboard products to builders and renovators, but is still plagued by the reputation of asbestos because it knew as early as the 1950s about the impact – but persisted anyway. Maybe this deal could help it put the past behind it.

The details of the deal

Azek, which is headquartered in Chicago’s Fulton Market neighbourhood and NYSE-listed under the code AZEK, is a manufacturer of outdoor living furniture (think deck chairs for instance as well as railing and floorboards). Conventionally, most products are made of wood, but Azek’s products are made from up to 85% recycled material.

James Hardie will pay US$8.75bn/A$14bn, including Azek’s US$386m in debt, mostly in JHX’s shares – 1.034 for every Azek share, representing a 26% premium to the 30-day VWAP and a 21% premium to the 60-day VWAP. JHX shareholders will own 74% of the company and Azek’s investors will own 26%. James Hardie is already listed in New York, as well as Australia, and these will be maintained, but this deal could see the company eligible for broader index inclusion.

Management of the companies have boasted that the deal would offer ‘a comprehensive and innovative material replacement solution to homeowners, customers and contractors’.

‘We are uniting two highly complementary companies with large material conversion opportunities and shared culture centered around providing winning solutions to our customers and contractors,’ said James Hardie boss Aaron Erter. ‘Together, we will be well positioned to drive sustained above market growth as a leader across attractive categories for the exterior of the home’.

During CY24, both companies made $5.9bn in net sales and over $1.8bn adjusted EBITDA (for a 31% margin). They claim the deal will realise at least US$350m of additional annual adjusted EBITDA, via $125m of cost synergies and $500m of commercial synergies. Both boards have approved the deal and it will close in the second half of the calendar year. James Hardie shareholders will not get a vote because it is not being acquired, but Azek investors will. Both companies took the opportunity to reaffirm their CY25 guidance.

Why James Hardie is buying Azek?

Didn’t we just mention that above? That it’ll deliver higher profits to shareholders and there’ll be a bigger portfolio. Well, it isn’t the full story. The reality is that it is a difficult time in the building products sector with high inflation and interest rates. This is particularly true if you’re a listed company. Did you know that no less than 3 companies quit the ASX last year after stints of several decades – in CSR, Boral and Adbri?

James Hardie wants to stand out to US institutional investors more and more and making it into a major indice would be pivotal to that. In its current state, the company is reliant on deriving revenues from whole home renovations. But in acquiring Azek, it can make money from furniture purchases or smaller scale home renovations.

Look at Sherwin Williams (NYSE:SHW) for instance, it sells paint and has fared better than building materials companies because it caters for smaller-scale products that don’t need a full house renovation, and its share price performance has been better since the end of the pandemic.

Ultimately, when we last wrote on James Hardie, we said now wasn’t the right time. And this is a thesis we continue to stand by. We still don’t like the conditions in the building products sector.

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