Brad Jacobs on His Big Bet on Building Insulation

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1:59Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, we like talking about the old economy on this podcast, right? I don't even think when people use that term, old economy, I think it's kind of unfair. It's funny. I was literally about to respond and say that maybe like this whole old economy, new economy distinction, it's a little unfair. The old economy is still here. It's not, you know, it's not generative AI. but it's arguably, maybe it's even more important. The things that we call the old economy, you know, you couldn't have the new economy without cooling and heating.

2:37This is exactly what I was going to say, because like the old economy and the actual business of making things and moving things, heating and cooling is very much enmeshed with the new economy, which is all about generative AI. And in order to have generative AI, you need data centers, right? And if there's one thing we know about data centers, It's that they consume vast amounts of both building material and electricity. And yeah, heating and cooling. So, yes, you're absolutely right. We will no longer use the slur old economy. We will find some other word. But yes, we like talking about industries in which physical things get built and then sold at a higher price from which they were built from and how these things actually work.

3:23Yes, indeed. So we are going to be talking about that today. We also like occasionally talking about deals, and it's not every day that we get to talk about a deal that has literally just been announced and is, I think, one of the biggest deals that we've actually seen recently. That's right. It's a deal talk. Let's do it. Okay. So we do, in fact, have the perfect guest. We're going to be speaking with Brad Jacobs. He's been on the show before, and he is, of course, the CEO and founder of QXO, which has just announced a huge deal to buy a company called Top Build in the insulation space. They're paying$17 billion.

4:00And at the end of this acquisition, they expect to be the second largest publicly traded building products distributor in North America. So truly a melding of mergers and again, the old slash new economy. Brad, welcome back to All Thoughts. Thanks so much for coming on. Oh, my pleasure. Great to be here. Congrats on the deal. The first question I have to ask is, is it even accurate to call this an acquisition right now? Because if you're paying$17 billion for top build, looking at QXO's market cap, you guys are at like$17 billion as well. This looks like a merger. This is so big. This basically looks like a merger.

4:38Yeah, a merger. I'll go with merger. Merger's fine. We're putting together two great companies and forming an even greater one. You know what's funny? I hadn't heard of top build up until this morning or sorry, yesterday when the news came out that you're going to buy it. You know what I was thinking about? Like America's incredible. Like this company, so it stocked now with the premium that's baked in today trading at 484. This was a$43 stock as recently as 2018. America's incredible. Like these companies that sort of fly under most people's radars can just do, you don't have to be in the invidious of the world to make a lot of money.

5:15Well, I agree with that. You have to have a service or a product that there's demand for. And you've got to give a great customer experience. And if you have those two things, you'll make a lot of money. All right. So walk us through the rationale for doing this, because again, like a huge deal, and it seems to have caught a few people off guard. They were expecting you to maybe buy some smaller companies, keep the roll-up strategy going. But again, this one is very large. Oh, yeah. So the acquisition of Beacon following the acquisition of Kodiak, which is followed now by the acquisition of TopBuild, takes us from 11 months ago where we had no building products revenue, let alone EBITDA, to the second largest publicly traded building products distributor in North America with more than$18 billion in combined company revenue and more than$2 billion of combined adjusted revenue.

6:12It's a big deal. It's a big deal in the industry. It's a big deal in the market as a whole. It's very creative to our earnings, meaningfully creative to our earnings. And when you look at the multiples, that's reasonable multiples. We're paying 14.9 times 2025 EBITDA pre-synergies and about 11.8 times EBITDA post-synergies. And there's tons of synergies we can get. We're targeting$300 million or so of synergies over the next five years. Just to zoom out for a little bit, regular listeners, of course, know who Brad is. We've had him on the show several times. But just in case you don't, he is a serial entrepreneur.

6:53If there's ever a company and their ticker has Exo in the handle, it almost certainly was founded by Brad. One exception. Which one? ExxonMobil. You didn't found that one? Nope, nope. I wish I had. One that got away. Got away from me. But it's always these, again, I hate words like real economy and old economy, but we can say physical economy. And it's like warehouses and trucking and freight brokerage and construction equipment rental and garbage stuff, like anything real and physical. That's what Brad's into. He's funded numerous companies. He also wrote a book, came out in 2024, How to Make a Few Billion Dollars.

7:35And the reason I still have this job today is because I haven't gotten around to reading the book yet. had I gotten around to reading the book yet, I'd probably be a billionaire by now and I would be doing something different. But I'll get around to doing that eventually. One thing that's interesting though, to me, just learning about Top Build today, in addition to seeing their stock, they had also been a serial acquirer. And in fact, it said like in one of their recent presentations, this has been one of their main strategies. So why don't you like talk about like, who is this company, Top Build?

8:02What do they do? Tell us a little bit about the history and the footprint of this company that you're buying? Top Build is the largest installer and distributor of insulation. And as you were just saying, everybody needs insulation. Every house needs insulation in the walls. Every office building needs insulation everywhere. It's a needed product and it's not going anywhere. It's not going to be disrupted by AI or LLMs. It's just not going to go away. So when we complete the merger, we'll be number one in insulation, we'll be the second biggest in roofing, we'll be number one in waterproofing, and we'll hold number one or number two positions in certain geographies within lumber and building materials.

8:49So we'll have a huge addressable market, several hundred billion dollars. So I take the point that everyone needs insulation. This is definitely true, but we alluded to this in the intro. Data centers in particular need insulation. How much of this deal is the expectation that you're going to be getting a lot of business from the data center build out as well? Oh, we will get a lot of business from data centers, but not just on the insulation. Data centers need roofs too. Data centers need waterproofing, very much so. Data centers often need lumber-related products. So data centers are big consumers of building products.

9:27Now, TopBuild itself has single-digit percentage exposure to data centers, but it's very fast growing. Wait, sorry, say that. How much exposure? Single-digit percentage of the revenue. Got it, got it. But in terms of growth, it's growing very, very fast. Okay. So when we think about the insulation market in general, how much is it residential? How much is it commercial? And is there a lot of overlap or do companies tend to specialize in one or the other? It's fairly evenly split. They have a little more residential than commercial, but they have both. They have both. And we have that as well, by the way, in the two companies we bought before this, Beacon and Kodiak.

10:06We have residential customers, we have commercial customers, we have industrial customers, we have municipal customers. Everybody needs building products. If there's a building, it's made of building products. And just to be clear on the nature of the business, they do installation, like within the insulation supply chain, where do they sit exactly? Do they manufacture it or is it just distribution and installation? What do they do? They don't manufacture. They buy it and then they either resell it at a higher price to a contractor or they actually install it. They sell it and install it and to various customers.

10:42Okay. Well, now I have a dumb question, but is there a quality differential when it comes to insulation? Like, is there a particular type of insulation that a data center would need versus your run-of-the-mill house? There's not too many different types of insulation, but there are different types. And the big manufacturers are ones like Owens Corning or John Mansfield or Knauf is another big one. So, you know, big companies and very high quality stuff. So, Insulation has been around for a long time, but technology makes it better and better every decade. Where's it made, insulation? It's mostly made in the United States.

11:19Is it? Yeah. This seems to be, I was surprised. I remember the last time we talked to you about roofing and you mentioned how much shingles is still made in the US. Talk to us about why is that? Why is this a particular type of good that is still largely, what are the economics of it such that it still makes sense to manufacture it in the United States? It's more about regulations. Okay. So the types of building products, the regulations, the codes are different country to country. So insulation in Europe is not quite the same as insulation here. Roofing products in Europe, not quite the same as it is over here.

11:53So waterproofing, same thing. So slightly different regs. And that makes it better to manufacture closer to where it's being used. So how did Top Build actually get on your radar? Did you initially approach them? Did they approach you? We approached them. Absolutely, we approached them first, yeah. Okay, so now I'm very curious because I know you have a lot of experience in M &A and a lot of people would describe your business as basically a roll-up for building materials. But I also know from reading your book, and by the way, Joe, I am not yet a billionaire, but I did read the book. You have a very specialized process when you target a company to acquire them, including having a former CIA intelligence officer, one of the guys who I think worked with lie detection.

12:45He was on your podcast. Yeah, yeah. Yes, yes. So did he interview all the CEOs? They all went through background checks and that sort of thing? So we didn't do background checks, but we spent two days in our lawyer's offices here in New York. And about 15 members of the senior management team of Top Build came up, including the CEO and CFO. And yeah, we interviewed each one for like an hour and a half and got to know them. And I checked out. Everything they said was true. I love that. Interview two guys for an hour and a half and say, here's$17 billion. Sounds good. Now, I'm sure it's a little more complicated than that.

13:18What else goes in in the due diligence process? Do you go around and talk to customers? Oh, yeah. So talk to us about that. Well, we have a lot of the same customers. We have a lot of the same vendors. Okay. Big, big overlap. So Top Bill is a very well-known company. It's the number one company in its field. So it's pretty easy to check them out. So we knew what we were getting before we did those interviews over two days. But still, you want to talk to the people. You want to find out where are the skeletons and what are the risks? and what are the good things and where's the opportunities and where's the upside and what are some things you can bring to the table, particularly in terms of technology that could turbocharge the growth of the company.

13:55So those in-person meetings are very important. It's not the only part of due diligence. You do a lot of stuff online, you do a lot of stuff with third party channel checks, but those in-person meetings with the management team are absolutely crucial. I would never buy a company, any company, without doing management interviews. That's the most important part of due diligence. It's funny. I was hanging out with some people over the weekend and I was hearing about some deals that they were doing in the AI space, including a pretty large deal that apparently they completed in an afternoon. And you can imagine what the due diligence process is on a deal that's completed in a single afternoon.

14:33I don't know how to do that yet. That's over my capabilities, but it doesn't take a long time. We're surgical and not overly intrusive in the due diligence, but afternoon's a little tight.

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17:10Secure every agent. Secure any agent. Okta secures AI. So what made you comfortable with the premium? Because again, 23 % on the existing share price of top build, that's a pretty, you know, that's a pretty nice amount of money. Yeah, it's a fair price. It's not a terribly high price. It's not a terribly low price. When you look at multiples of EBITDA, it's 14.9 times 2025 EBITDA pre-synergies and about 11.8 times EBITDA post-synergies, the expected synergies. So it's reasonably priced. It's a lower multiple than we trade at, which is very important because that's where you get the accretion, the accretion to earnings per share.

17:51This is going to be a massively accretive transaction for us. Talk to us about setting aside this acquisition, which we'll come back to. How does business feel over the last year? You know, just general economic conditions in the building materials distribution world. What's been the last year like? Super soft. Super, super soft. Now, super soft because demand in general in building and construction is soft, is weak, and we're not immune to that. but we've mostly been in roofing up until recently. Yeah, right. Now, roofing is a special animal because it's extremely affected by weather, meaning bad weather.

18:31You want to have... Bad weather is good weather for roofing. So you want to have sleet and a lot of hailstorms and hurricanes and tornadoes. And I got to tell you, there's a lot of cognitive dissonance about that because all my life, I've watched television. You see a hurricane like normal people, unless you're a sociopath, you feel bad. They feel, oh, wow, it's too bad that these people are getting their - Wait, have you become a sociopath? No, no, no, no. Definitely not becoming a sociopath. What? No hell? When's it going to hell? No, but my point is this. If a normal person watches television and sees people's houses getting, the roof's being blown off, usually you feel bad about that.

19:09You feel compassionate. You feel, oh, wow, it's too bad for them. Yeah. So there's a dissonance here because that's really good for the roofing business. So one half of your brain is still a human and compassion and feeling bad for this. And the other side, you're, yeah, great. I got a storm. I got a hail storm. Isn't that fantastic? These people's roofs all go flying off. We're going to get more business. So the good or bad news, depending on your perspective, is in 2025, there really weren't any big storms. There weren't any named storm, big hurricanes, tornadoes. So that was bad. And compounding on that in the first quarter here, you had the bad kind of bad weather, which is snow and other bad weather that just slowed everything down to stop business, but didn't create any demand from roofs.

19:52Didn't create any roof damage. Exactly. So the external conditions haven't been great. Now, that said, I don't care because I'm not building a business for one year or two years or three years like I did in my previous companies. I'm building a strong, durable, iconic company that's going to be around for decades. And that's what I think. We're always thinking about long-term. We're thinking five, 10 years. We're not thinking about a quarter or the year. If we have a choice on a decision for capital allocation or M &A or investments, we barely think about how is it going to affect this quarter, this year.

20:27It's really how is it going to affect the long-term. Were you impacted by the tariffs at all? Did that complicate the existing business? Not too much because in roofing, which is what we've been up until Kodiak and our top build, almost all of it is manufactured in the United States, sold in the United States, or manufactured in Canada or sold in Canada. And we really don't have business overseas. So the tariffs didn't really affect us. Now, it might have affected demand destruction overall. It might have affected how much construction was happening. But directly, we were not clobbered by the tariffs.

21:02The weather clobbered us a lot more than the tariffs. What is the main commodity input for insulation? Oh, it's chemical. It's chemically created and it's refined in a manufacturer with a lot of people looking like chemists. So is it petrochemical? If oil prices were to surge, would that be a sort of margin crimping factor for insulation prices? Well, I think we're better off with oil prices lower for demand, not so much for the cost of the goods, but lower oil prices, there's more confidence and more demand. But the real factor for building products is mortgage rates. So mortgage rates when they were 7.5 % was really bad.

21:47Yeah. Because people had 3 % mortgages or 3.25 % mortgages, and people just have a problem paying off a 3 % mortgage and taking out a 7 % mortgage. They're now down a bit, 6.5%. percent, but they got to come down more. So when the Iran war finally ends, and it'll end someday, and interest rates come down, which they will under this administration, it's pretty good odds that mortgage rates will come down and business will start booming. Yeah, this is what I wanted to ask, which is, I guess, financing availability at the moment, because clearly we are in the midst of this Iran situation, and we have seen some very volatile markets out there.

22:26We've seen traders start to ratchet down, I guess, their expectations for a rate cut later this year. What's financing been like for you at QXO? We have no problem getting access to capital. That's not been an issue for us. We've raised, since I started the company almost a couple of years ago, we've raised something like$15 billion and fairly easily. On this transaction here, in addition to that, we've got$17 billion. Now, part of that, roughly about 55 % of it is going to be in the form of stock. But the other is cash. And we got debt commitments from Morgan Stanley and from Wells Fargo and from Barclays and pulled that all together in about a week.

23:10Is synergies, when you talk about the future cost savings, is that a euphemism for layoffs? No, just the opposite. Okay. It's to grow the business. It's to figure out ways that you can cross-sell customers. A contractor who is buying roofing and putting that into their construction, pretty good chance they're going to want insulation in what they're building too. So we also sell windows and doors, for example, and all of our customers have some exposure to windows and doors. And we'll be number one in insulation, number two in roofing, number one in waterproofing, and number one or number two in the key geographies served within lumber and building materials.

23:53There's a lot of cross-selling between insulation, roofing, waterproofing, and lumber. Wait, say more about that because, you know, we hear from executives all the time when they talk about synergies in kind of general terms. But what exactly is, I guess, the low hanging fruit in this particular deal? Like, what is it that you're able to do from day one versus what you're able to do in like a year or two? Well, the first thing that we do when we go in to buy a company, whether it's Top Builder or anybody else, is we meet with as many people as we can. And we ask them to just step back, get out of their normal comfort zone, and think about what would be the perfect circumstances and tools and techniques and repositioning of the company to grow even faster.

24:39Where are their pain points? Where are things that are holding them back? And we collaboratively put together a business plan. Now, I already know, like with every other acquisition we've done ever, technology is going to be the first thing. Technology today slows people down in the market. They've got to get the latest technology, the greatest warehouse management systems, which we'll bring to the table, the greatest TMS, transportation management systems, the greatest ERP, which is also using a CRM that's AI generated to empower the sales force, get productivity up. Technology is the number one enabler of synergies.

25:17But there's going to be so many synergies here. The cross-selling is a big one. There are some cost savings. When you're a bigger player, we're going to be the second biggest publicly traded building products distributor. We will get, because we deserve, a better price from the manufacturers. I mean, bigger customers get bigger discounts, bigger rebates than the smaller customers. So a building products distributor, like any distributor, makes money by buying products as cheap as possible and then selling them at a reasonable price. That's a markup from what you're buying. These are the two main things.