Numbers add up for Kingspan’s acquisition

Cantillon: Brokers believe €700m insulation and foam deal with Recticel makes sense

The €700 million that insulation specialist Kingspan is prepared to pay for Belgian rival Recticel is ahead of the €660 million in cash and available credit that chief executive Gene Murtagh recently said was at the Irish group's disposal.

However, while Kingspan is bidding for both Recticel’s insulation and flexible foam businesses, it will sell the latter division as soon as the deal is done to an as-yet unnamed third party with which it says it has already got an agreement.

On this basis, brokers’ estimates of the likely final cost of the deal to Kingspan vary. Analysts at Jefferies in the UK suggested after the offer was announced on Tuesday that the Irish company would sell the foam business for about €350 million.

UBS, which issued a note around the same time, put the final price that Kingspan is likely to pay at €370 million. Meanwhile, analysts Flor O'Donoghue and Robert Gardiner at Dublin stockbrokers Davy suggested the insulation business is likely to be worth slightly more than €400 million.

They based this on the fact that while its sales are lower than those of the foam operation, insulation generates more cash and profits. Recticel’s figures show that, last year, insulation accounted for €271.2 million in sales and €44.7 million in profits, while flexible foam accounted for €621.5 million in turnover and €41.5 million in profit.

Business overlap

While they may differ on the final price, brokers do agree that the deal makes sense for Kingspan. There is already an overlap between the pair’s insulation businesses, so buying Recticel’s operation would increase the Irish company’s market share.

O’Donoghue and Gardiner calculate that the Belgian player would add 30 per cent to Kingspan’s insulation board panel sales over a full year while consolidating its market position in the UK and Benelux countries. It could also add 4 per cent to predicted earnings per share for 2019. UBS and Jefferies made similarly positive predictions for the deal’s impact on Kingspan.

With the brokers on side, all that remains for Kingspan is to convince Recticel’s board and shareholders, and the competition regulators, that the deal is a good one.