Houston-based Quanex Building Products Corp. jumped at the chance to buy HL Plastics Ltd., a United Kingdom vinyl window profile extruder, in a $149 million deal sealed June 15, Quanex Chairman, President and CEO Bill Griffiths said in a telephone interview.
HL complements a subsidiary Quanex owns 40 miles from the newly acquired company in Denby, England, and it helps Quanex enter the window market in Europe.
Quanex bought its subsidiary in England, Edgetech I.G. Inc., for $107 million back in 2011. Located in Coventry, the business makes insulating glass spacer systems — a key element for energy efficiency — for window and door manufacturers.
HL makes vinyl frames for window manufacturers among other products. Although the two businesses don't serve the same customers, they serve the same industry. And that's what prompted Griffiths to move quickly when HL was recently put up for sale.
“We think there's an opportunity for the two companies to work together to perhaps do some cross selling between them,” Griffiths said. “We'll start exploring that next month.”
When it comes to measuring the energy efficiency of windows, the frame, the glass and the insulation are the three factors that determine performance.
“The frame is a critical part of the design and HL certainly has a leading position in energy efficiency, which is much more important in Europe than it is in the U.S.,” Griffiths said.
Don't get him started on that topic, he warned. Born, raised and educated in the U.K. before stints in South Africa, Scandinavia and Canada, Griffiths has lived in the United States since 1993 and been a U.S. citizen since 2003.
“We're energy hogs because we have cheap energy in the U.S.,” he said. “I'm a little cynical on this point as my colleagues will tell you. Energy costs three to four times more in Europe and it's a big deal. You don't have the choice of buying an inexpensive $150 vinyl window at Home Depot. You can't do that in Europe because energy efficiency is legislated so the spread between high-end and low-end windows doesn't exist there. It's all highly energy efficient.”
Although HL won't directly use the warm spacers the subsidiary makes, there's a good chance HL's customers will.
“If the two companies work together, there are probably opportunities for new customers, additional customers or additional business with existing customers,” Griffiths said.
Quanex bought HL, which is part of Flamstead Holdings Ltd., in an all-cash deal that also includes Wegoma Machinery Sales Ltd. — a maker of PVC and aluminum manufacturing machines for the window fabrication market — and Vintage Windows Ltd., a niche window maker.
With more than $600 million in sales, Quanex is a leading supplier of window and door components to OEMs but Griffiths said there are no direct synergies with its latest acquisition.
“HL will stand alone,” he said. “It will report directly to me. We will not integrate it with our U.S. vinyl extrusion business because they operate in two completely different markets with two completely different sets of customers.”
In the United States, Quanex gets roughly a third of its sales from vinyl profile sales, a third from accessories, such as insect screens, and a third from the spacers that go between the double glazing in glass.
“Our subsidiary in the U.K. manufacturers that spacer and that's the only product we sold there,” Griffiths said. “HL services a different part of the window component industry in the U.K. so it's really a perfect strategic fit for us in a world we clearly understand. It was of scale. It was nicely profitable, and there's a commitment from the management team to stay on and run the business for another five years at least.”
HL also sells conservatory roofs, hardware, foam trim products, fencing, decking, water retention barriers and related products. The 40-year-old business had sales of $101 million in the last 12 months and earnings before interest, taxes, depreciation and amortization (EBITDA) of $18 million, according to a Quanex presentation filed with the U.S. Securities Exchange Commission.
In addition to a geographic reach across the United Kingdom and Ireland, HL has a new vinyl extrusion facility and has built up a good reputation for its Liniar brand name, which accounts for more than 85 percent of its sales, according to Quanex.
With 200 product shapes, HL claims to be the fastest growing vinyl extruder in the United Kingdom, and it serves an attractive high-end, low complexity market, the eight-page Quanex presentation says.
The timing of the deal also was right, according to Quanex, pointing to this period as an early stage of the U.K. housing recovery and noting it could be a platform for future growth in Europe. Quanex cited a 25 percent increase in U.K. housing starts in 2014, but also says that like the United States, demand is heavily weighted toward the replacement and remodeling activity.
Quanex completed the purchase from shareholders on June 15, agreeing to fund the deal with cash and $92 million from credit lenders. Quanex expects the purchase to be accretive in 2016 with estimates between 20 cents and 25 cents per share.
In the transaction, Flamstead became a wholly owned subsidiary of Quanex. The current HL management team will stay on board. HL has 420 employees.
“Quanex enjoys a clear leadership position as a pre-eminent component supplier to the fenestration industry, and as such represents a logical and compelling strategic fit for HL at this beneficial inflection point in the U.K. housing market,” HL Plastics CEO Roger Hartshorn said in a news release. Hartshorn will continue as group CEO for at least five years.
“My commitment has always been to launch new and exciting products for the benefit of our customers, and to generate employment opportunities to stimulate the economy — and with the Quanex resources behind us, we will unlock the potential to achieve even greater success,” Hartshorn added.
His partner's decision to retire spurred the HL sale and Quanex was ready to buy.
“We've been actively pursuing acquisitions like this now for about a year and a half,” Griffiths said. “We've done a tremendous amount of groundwork both here and in Europe talking to a lot of people like bankers and companies that we thought we would be a good fit. In this particular case they knew we were looking for a business just like this.”
Although this is the third acquisition for Quanex since late 2012, Griffiths said it is the first one he considers “material” and it probably won't be the last.
“We are absolutely at the beginning of an acquisition streak,” he explained. “We've been very clear about our strategy. We have a very good core business in the U.S. We've had a bit of a complicated history and we sold off some businesses and now we have this very clean, easy to understand window component business. As soon as we got it cleaned up we made it very clear to the rest of the world that we have plenty of cash available to us, we have good positive cash flow inside of our business, and we will actively acquire companies in our direct space that make good economic sense. This is the first one of scale along that path.”
Tarpey Harris Ltd. and Flamstead Investments Ltd., the remaining companies in the Flamstead Group owned by Hartshorn, will see no change.
Wells Fargo Securities served as financial advisor for Quanex and Travers Smith LLP served as its legal counsel.