Mohawk Goes Shopping In Italy, Buys Marazzi

| About: Mohawk Industries (MHK)
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Shares of Mohawk Industries (MHK) rose 4.9% in Friday's trading session. The producer of floor covering products in the United States and Europe announced its intention to acquire Italian-based Marazzi Group, in an attempt to create a world leader in ceramic tiles.

The Deal

Mohawk announced that it has agreed to acquire the Marazzi Group, a manufacturer and marketer of ceramic tiles. Mohawk will pay 1.17 billion Euro for Marazzi, the equivalent of $1.5 billion, in a combination of cash and equity.

Mohawk notes that the ceramic tile remains the most used floor product across the globe with a consumption of 110 billion square feet. The market is expected to growth by 5 to 6% per annum. Marazzi has a strong international sales force with distribution capabilities in over a 100 countries.

CEO and Chairman Jeff Lorberbaum commented on the deal, "This acquisition represents the next step in the expansion of Mohawk's global business and will make Mohawk a stronger company. We found Marazzi attractive because of its solid management team and leadership positions in the US, Russia and Europe. Marazzi's differentiated products, leading-edge design, efficient manufacturing and exemplary service have created one of the most valued brands in the industry. We have many opportunities to improve results by leveraging best practices, operational expertise, product innovation and manufacturing assets."

For the full year of 2011, Marazzi generated revenues of $1.16 billion on which it reported EBITDA of 145 million Euro, or roughly $180 million dollar. The deal values Marazzi at 1.3 times annual revenues and roughly 8 times EBITDA. Mohawk expects that the deal will be accretive to 2013s earnings.

Mohawk will acquire Marazzi from the family Marazzi who currently owns the business and private equity firms Permira and Private Equity Partners.

The company expects to close the deal during the first quarter of 2013. The deal is subject to customary closing conditions, including regulatory approval.


Mohawk ended its third quarter with $381 million in cash and equivalents. The company operates with $1.53 billion in short and long term debt, for a net debt position of $1.15 billion.

For the first nine months of 2012, Mohawk generated revenues of $4.35 billion. The company net earned $183.9 million for the period, or $2.66 per diluted share. The company is on track to generate annual revenues around $5.75 billion on which it could earn $225-$250 million, or around $3.40 per share.

Factoring in Friday's gains, the market values Mohawk at $6.3 billion. This values Mohawk at 1.1 times annual revenues and 26-27 times annual earnings.

Mohawk does not pay a dividend at the moment.

Some Historical Perspective

Year to date, shares of Mohawk have risen some 53%. Shares started the year around $60 per share and steadily rose to highs for the year around $91 per share.

Shares of Mohawk set all time highs little over $100 per share back in 2007. Shares fell back to lows of $18 during the recession back in 2009. Shares steadily recovered from that point in time, trading within sight of all time highs.

Full year revenues for 2012, expected to come in around $5.75 billion are still some 15% below the level in 2008. The company has significantly improved its profitability, being profitable for three years in a row after posting a loss of over a billion back in 2008.

Investment Thesis

It seems that Mohawk has made an excellent deal. The net debt position will increase, depending on the financing ratio between equity and debt, but will remain within acceptable ranges. Most likely, the current net debt position of $1.15 billion will increase to $2.0-$2.5 billion.

The valuation of 1.3 times annual revenues seems fair as well and is in line with Mohawk's on multiple of 1.1 times annual revenues. Note that Marazzi is more profitable reporting a 15.5% EBITDA margin. This compares to an EBITDA margin of 12.1% for Mohawk for the third quarter. Furthermore, the companies should be able to identify significant costs synergies, although these were not specified in the press release.

Combined, the entity will report pro-forma revenues approaching $7 billion. Depending on the amount of new equity issued, the company equity is valued at 0.9-1.0 times annual revenues. The company could see significant accretion to earnings as well, depending on the financing mix chosen, and the amount of synergies to be identified.

The deal with Marazzi is not the first deal for Mohawk this year. In October of the year the company announced the acquisition of Pergo, in a $150 million cash deal. Mohawk is not the only company taking advantage of bargain prices in Italy. On Friday General Electric (GE) announced the acquisition of Avio S.p.A.

I remain on the sidelines. While the deal is executed at a favorable price and significantly boosts Mohawk's operations, the current valuation is not appealing enough. Mohawk will trade at a pro-forma valuation of roughly 1.0 times annual revenues and 20-25 times annual earnings.

Especially the earnings valuation is a little too rich for me given the increase in leverage and lack of dividends, or shareholder repurchases. Furthermore the current share price, which roughly five-folded from lows in 2009, reflects too much optimism regarding the housing recovery.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.