Fitch places AZEK on positive rating watch amid acquisition by James Hardie

Investing.com -- Fitch Ratings has placed the AZEK Company Inc and The AZEK Group LLC (AZEK) Long-Term Issuer Default Ratings (IDRs) of ’BB’ and all issue-level ratings on Rating Watch Positive (RWP). This announcement follows the news that AZEK is set to be acquired by James Hardie (NYSE:JHX) Industries plc (James Hardie; BBB/Negative).

As part of the agreement, AZEK shareholders will receive $26.45 in cash and 1.034 ordinary shares of James Hardie for each AZEK share at closing. The transaction is expected to significantly enhance the combined company’s scale, geographic footprint, and customer and product portfolio, thus strengthening profitability and cash flows. Fitch intends to resolve the Rating Watch upon the closure of the transaction, which is anticipated in the second half of 2025.

The total transaction value of the acquisition is $8.75 billion, representing a 22.4x EBITDA multiple based on AZEK’s last twelve months (LTM) EBITDA of $390 million. The combined entity’s pro forma revenues are projected to reach approximately $5.9 billion, with an EBITDA over $1.4 billion before synergies.

The proposed combination is expected to benefit AZEK’s business profile by improving the company’s scale, expanding its product offerings to include a wider range of exterior siding products, and strengthening global geographic diversification. However, Fitch views the combined entity as having weaker credit metrics, with EBITDA leverage on a pro forma basis of around 3.7x, compared to AZEK’s standalone EBITDA leverage of 1.2x for the LTM ended Dec. 31, 2024.

Despite a weak demand environment, Fitch expects the combined entity to benefit from higher pricing and a continued shift toward engineered outdoor products and fiber cement siding. AZEK’s profitability is reflected in its Fitch-calculated EBITDA margin of 25.5% in fiscal 2024. On a combined basis, the Fitch-calculated EBITDA margin is around 26.3%, excluding any potential cost synergies.

Fitch believes the combined entity will benefit from economies of scale and the innovative product offering, enabling it to maintain strong pricing and above-average margins compared to its peers. AZEK, a leading player in the residential outdoor living market, is expected to capitalize on long-term shift away from traditional materials, such as wood, to drive above-market growth.

The company is designing and implementing remediation plans to address identified material weaknesses in the company’s internal control over financial reporting. This comes after an independent investigation revealed an overstatement of inventory and an understatement of cost of sales due to misstated inventory by a former employee.

AZEK holds a strong market position in North America for residential composite outdoor living, with an estimated 30% share of the composite decking and railing market. The ’BB’ IDR reflects AZEK’s leading market position, favorable end-market mix, positive FCF generation and conservative financial policies.

Fitch expects revenue to grow organically 5%-6% in 2025 and 2026, with an EBITDA margin of 24.5% - 25.5% in the same period. EBITDA leverage of 1.0x-1.5x is expected at fiscal year-end 2025 and 2026 due to EBITDA growth.

Fitch will resolve the RWP upon the completion of the contemplated transaction under proposed terms. If the transaction does not close, a positive ratings action could result from sustained EBITDA margin at or above 20%, remediation of the material weaknesses in internal control over financial reporting, and Fitch’s expectation that EBITDA leverage will sustain below 3.0x.

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