Brick and concrete products manufacturer Forterra has broadened its end markets and added to the group's growth prospects with what we see as the opportunistic £20m acquisition of the trade and assets of Bison Manufacturing from loss-making construction group Laing O'Rourke. Forterra states that it would have cost over £35m to build the business itself on a greenfield site and estimates that the deal will make returns in excess of its cost of capital during 2019. We estimate it will at least break even in 2018.
Bison is the UK's leading manufacturer of "hollowcore" precast concrete flooring with a highly automated manufacturing facility located at Swadlincote, Derbyshire and opened in 2006. The site also includes a specialist precast facility capable of producing a wide range of bespoke precast concrete products complementing Forterra's own range. Products include lightweight flooring slabs (see over) for houses and flats as well as a range of other uses in commercial buildings as well bridge decking for infrastructure projects. Housing and infrastructure are the focus of huge government investment initiatives.
However, the Bison plant has been operating at little more than 50% utilisation, whereas Forterra's activities have been capacityconstrained. We see significant scope to increase utilisation through Forterra's existing sales channels and through product innovation, drawing on both companies' expertise. We understand that Forterra will apply the highly-recognised Bison brand to its own relevant concrete products. Importantly, the deal has been underpinned with a five year agreement to supply hollowcore and other precast products to Laing O’Rourke's contracting operations.
We will further examine the financial implications following Forterra's interim results on Monday 1 August, but Bison's revenue on the assets being purchased was £22.8m in the year to 31 March 2017, and the loss at EBITDA level of £1.1m. We see significant operational leverage to result from increasing the capacity utilisation.
The deal offers Forterra an attractively-valued solution to its growth conundrum. We have argued that the management is very conservative and, thus, cautious about building new brick capacity unless it is really convinced of long-term new housebuilding demand (being more inclined to invest modestly in quick return "debottlenecking" projects). This move allows it to add to growth, in government priority sectors, but at a modest price.