CRH tests €2bn-plus sale of Europe distributions unit

CRH has signalled it is prepared to sell its Europe distribution business, which could raise more than €2 billion, as the building materials giant sets out new financial targets for the next four years.

Market sources said the low-margin business, which sells and distributes building materials to professional builders, heating and plumbing contractors and DIY customers in continental Europe, could generate up to €2.4 billion in a sale. They said it may attract the UK-based Kingfisher or France’s Saint-Gobain.

While the unit provided 16 per cent of the group’s €27.6 billion of sales last year, its €269 million of earnings before interest, tax, depreciation and amortisation (ebitda) equated to just 9 per cent of the entire company’s figure.

News of the strategic review comes months after CRH sold its US distribution business, Allied Building Products, for $2.6 billion (€2.2bn), and would maintain a strategy pursued by chief executive Albert Manifold since he took over the reins in early 2014 of selling underperforming assets or businesses that no longer fit its model.

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CRH also said on Thursday that it plans to boost its ebitda margin by 3 percentage points by 2021 from 12 per cent reported for last year, and that it aims to have €7 billion of “financial capacity” over the period to spend on “value-creation for our shareholders.” Analysts expect that most of this will be spent on acquisitions, even as it recently launched its first share buyback programme in a decade.

CRH said that its focus for the Europe distribution business, which has had a “mixed performance in recent years”, is to improve its margins and returns, though it would also “explore other strategic options”.

"This is likely to lead to speculation about a possible sale of the business," said Davy analysts Robert Gardiner and Barry Dixon in a note to clients.

Boost margins

Paul Cahill, an analyst with Investec, is estimating that CRH will increase its ebitda margin by 1.8 percentage points by 2020, and that a sale of the Europe distribution business would automatically boost margins by a further 1.4 points. The division was impacted in the first quarter of this year by adverse weather conditions, which pulled like-for-like sales 1 per cent behind the same period in 2017.

Shares in CRH rose as much as 5.5 per cent to €32.17 on Thursday, before ending the session up 3.7 per cent.

In addition to its strategic review, CRH also said Thursday it plans to establish a new global building products division from January 1st, 2019. That division will pull together the company's Europe lightside, Europe distribution and Americas products division. Keith Haas, currently president of the Americas products division, will lead the new unit.

“We welcome the targets set by CRH this morning, and certainly it provides the potential for upside in our medium-term estimates,” said Robert Eason, an analyst with Goodbody Stockbrokers. “This, coupled with the ability to deploy at least €7 billion of capital, underpins our continued positive stance on the stock.”