Overview

Foundation Building Materials (Pending:FBM) filed an S-1/A with the Securities and Exchange Commission for its upcoming initial public offering. The company is offering 12.8 million shares of its common stock at a marketed price range of $17 to $19 and is expect to price Thursday night (2.9). It also has an additional 1.92 million shares as an overallotment option for its underwriters. Assuming Foundation Building Materials prices at the mid-point of its price range, it would command a fully diluted market cap of 759.8M and trade at a price/sales multiple of 0.39x. According to some sources, there is concern regarding price sensitivity.

The joint book-running managers for the deal are Deutsche Bank Securities, Barclays, RBC Capital Markets and Citigroup. The lead manager is Baird, and the co-managers are Raymond James, Stephens Inc., SunTrust Robinson Humphrey and William Blair.

Business summary

Foundation Building Materials is the second biggest distributor of suspended ceiling systems and wallboard in Canada and the U.S. Founded in 2011 in Tustin, California, the company reports that it is the fastest growing building materials distributor by its revenue growth since it was founded. In addition to its ceiling systems and wallboard, the company is also one of the biggest manufacturers and distributors of industrial and commercial mechanical insulation in the U.S.

The company reports that it has more than 30,000 customers and over 210 branches carrying 35,00 SKUs. Between 2013 and 2016, the company increased its US wallboard market share from 2.6% to 7.6%. The company was bought by private-equity firm Lone Star in October 2015.

Executive management team overview

The founder of Foundation Building Materials, Ruben Mendoza serves as the president and chief executive officer of the company. He has more than 25 years of experience in the industry. Before founding the company, Mendoza was the CEO of AMS, which is a distributor of ceiling systems, wallboard, plaster and lathe products and other building materials.

Mendoza worked in a variety of different roles of increasing responsibility since joining that company in 1991. Mendoza attended college at the California State University and has completed educational programs for executives at Harvard Business School, Wharton School of Business, and Northwestern University.

John Gorey is the chief financial officer of Foundation Building Materials and has 30 years of experience in the industry. He joined the company in 2011. Before that, he served as the CFO of AMS, which he joined in 1986. Before that, he worked as an accountant at Barry McKinley and Associates. Gorey has a Bachelor of Science in accounting from the University of Southern California.

Financial highlights and risks

Foundation Building Materials has demonstrated substantial revenue growth due to acquisitions. In 2013, the company reported it had net sales of $113.7 million. By the nine-month period that ended on Sept. 30, 2016, the company reported net sales of $930.3M and $1.42 billion on a pro forma basis reflecting acquisitions.

The company recorded a net loss of $9.4M and $13.2M for the last nine months ended 9.30.16 and year 2015, respectively. The company has expanded rapidly through making nineteen acquisitions in both the U.S. and Canada since 2013, with a recent deal including of Superior Plus Corp.'s Construction Products Distribution business for $325M in August.

Among its risk factors, Foundation Building Materials highlights its highly leveraged business model as a potential risk in preventing the company from raising additional capital in the future and exposing it to interest rate risk. As of 9.30.16, its aggregate principal amount of debt was approximately $765 million. Additionally, Lone Star will own ~70.1% of the company after its IPO, and therefore, majority voting power which would limit the power of other shareholders.

Competitors

The company competes against lumberyards, big box retailers and other specialty distributors of building materials. It also competes with local and regional building materials distributors and companies. One publicly-traded wallboard supplier which competes with FBM is USG (NYSE:USG). USG trades at a higher prices/sales multiple, but is net profitable and has higher operating margins.

Conclusion

Foundation Building Materials has demonstrated impressive growth since its founding; however, it is highly leveraged and has a history of net losses.

We recommend investors hold off on investing at this point.

At this time, we are also hearing of some pricing concerns and the deal may price down.