Why Shares in This Housing Market Products Company Crashed This Week

Shares in fiber cement siding company James Hardie Industries (NYSE: JHX) declined by 15.8% in the week to Friday morning. There's no doubt why the move occurred; the announcement of an agreement to combine with outdoor decking company Azek (NYSE: AZEK) on Monday sent the shares sharply lower. However, there's a debate over whether the move downward is justified.

James Hardie agrees to combine with Azek

There are two concerns over the deal: the price and the fact that James Hardie is buying an asset in an industry that's continuing to be challenged by relatively high interest rates.

Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free »

The company is acquiring Azek in a combination of shares and cash with a total transaction value of $8.75 billion based on James Hardie's share price on March 21. Ultimately, James Hardie shareholders will end up with 74% of the combined company, and Azek shareholders will end up with 26%

Azek's 2025 guidance for sales of $1.535 billion and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $411 million implies some pretty hefty valuations for the $8.75 billion Azek deal.

That said, management believes it can generate $350 million in EBITDA synergies by combining the companies, equivalent to 5.9% of combined sales. Five percent is usually seen as a good target.

Moreover, the deal increases James Hardie's share of revenue from the less cyclical repair and remodel market and improves its exposure to North America housing to 81% from 74%.

Does the deal make sense?

From a strategic perspective, it does. After all, sidings and decking are a natural fit, and as seen with Owens Corning's (roofing and insulation) deal to buy doors company Masonite, there's a consolidation trend in the housebuilding products industry.

Unfortunately, market interest rates and, in turn, mortgage rates haven't come down as much as everyone hoped. Until they do, there will be negative sentiment on such deals amid concern that James Hardie is doubling down on a company in a challenged industry. However, if history is a guide, rates will eventually come down, and the deal could turn out to be a very opportune purchase.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.