Why Brad Jacobs Is Spending $11 Billion on a Roofing Supply Business

22:32And right now I am looking at a chart of shares of a company called James Hardy. It's an Australian company. And they just announced that they were buying something and their stock has tanked because people are worried that they've overpaid for a U.S. asset in the current environment. Do you worry at all that you've overpaid after adding on, you know, pretty decent premium? Well, I'm not in the weeds of that deal because that's a manufacturer, so I don't follow it as closely. But from what I've read, it looks like they paid something like 19 times EBITDA. And we paid 10 and a half times EBITDA.

23:07So, you know, if you pay very high multiples for companies, you know, that affects shareholder value. Now, I'm not condemning that deal because I'm not knowledgeable enough to condemn it. But generally speaking, the price you pay matters. It matters a lot because the ROIC, return on invested capital for acquisitions, the IC is the purchase price. And if you have a high purchase price, that lowers the ROIC. Your stock price is a function of your return on capital. Investors give you money, debt and equity, now you've got to get a return on that. And if you overpay for acquisitions, and I'm not saying they did because I don't know enough about it, but if you're perceived to be overpaying, then your stock's going to go down.

23:46You're comfortable with the 40 % premium that you paid. I love the price we paid. I think the price we paid is a fair price. It's not a terribly low price, but it's certainly not a high price. And this is a price that when you're paying 10 and a half times EBITDA, and that's before you double EBITDA, you're paying mid-single digits EBITDA for a nice business that's growing, that's got long-term growth to it, that 80 % of it is non-discretionary, that's tariff immune. and is the main reason why out of the 55 different industries we looked at, we picked building products distribution, which is this is an industry that's got growth to it because there's a shortage of something like 4 million homes in the United States.

24:27That's a big shortage. And it's one of the few things that both Democrats and Republicans completely agree on, that we need to solve this housing crisis. This housing shortage has to be solved. So there's going to be more construction. It'll be cyclical, but over the long-term arc is going to be more and more building. And then they're old. They're old. There's 40 million homes that are over 40 years old. By the way, they're all going to need to change their roofs. They're all what's called prospective customers for this business. So it's exposed to growth just for showing up and being in the game.

25:00And that's a good thing because you can do a thousand things right. But if the underlying trend is in your face, it's coming the wrong way, that's tough. Joe, as proof of concept of Brad's business plan, I took delivery yesterday, my husband and I, of a bunch of roof shingles. Always love a crazy house update. What's up? There we go. Because our insurance company says we have to replace the roof on our barn. So literally, you know, we have to have roofs and we have to do what the insurance company says. You're welcome, Brad. You've made your career sort of doing deals like this one after another sequentially.

25:36And unfortunately, time is linear and scarce and we only live once. If you could clone yourself and there were 100 Brad Jacobs, are there a lot more deals like this sitting out there that the only reason you're not doing them is because unfortunately we only have so much time? And the reason I partly ask this is because there are a lot of people in recent years, ex-MBAs, people who have told this story that there's tons of businesses out there that aren't being run at their maximal operational performance, some at the very small level, go buy a pool cleaning company and then roll it up into 10 and then you can make it better and make a bunch of money or an HVAC company, whatever.

26:18How much opportunity is there if time for you weren't a scarce asset. So first of all, that's a scary thought, 100 Brad Jenkins. But the answer to your question is yes and no. Yes, there's tons of opportunities of going into companies and significantly improving the profitability of them. But no, in the sense that there's not a lot of people who can do that. So I'm not the only guy who can do that. Ed Breeden can do this. Larry Culp can do this. Dave Cody can do this. There's a bunch of executives who've come out of academy-trained organizations like Ford. I guess if there were 100 Brad Jiggins, they'd all be competing against each other, and that would drive up the price of Beacon roofing even further.

26:56Anyway, keep going. We'll stick with one. Okay, yeah. Well, are you done on the deal-making front, or is this going to keep you busy for a while? Tracy, this is the first one. Yeah. We're going to build a$50 billion company over the next five or six years. Well, how quickly, though? Are you looking already? Absolutely. I have a deal team we're looking at, and we're talking, and we haven't even acquired Beacon yet. But even as we're about to acquire Beacon and we're focusing on the integration and optimization, we're still looking at other deals. We have tons of capacity to do that. I don't like to do like five deals at a time, five big deals.

27:28But I actually like doing a couple deals at a time because then you do one reorganization and then you pause for a year, year and a half while you're integrating and optimizing. You don't have to like start and stop. So I kind of like doing that. But when you look at M &A, M &A is going to be a big driver for our growth here. That's in our DNA. So$10 billion with Beacon gets us one-fifth of where we're going to be. So it's a good start, but it's really just a start. The acquisitions that Beacon have been doing are these relatively smaller ones. And they do like a dozen, 15 a year. And I met with the head of the M &A, the nice guy.

28:01And I asked him, I challenged him, I said, what's holding you back from doing two or three times that? He said, really nothing. It just hasn't been our goal. You just need a couple more people and we can get going. We have the backlog. We have the relationships. We have the network. We have the know-how. So I said, okay, well, I think we're going to do that. And we need to get more input and get more feedback before we just possibly say triple amount of acquisitions you're doing. But I think that's pretty likely we're going to come out saying, let's do more. Let's increase the pace of these smaller tuck-in acquisitions because the multiples are very reasonable on those small ones.

28:31And the synergies are really great. Then you have not a lot. You got a couple handfuls of medium-sized ones, ones that are like 50 million of EBITDA or$250 million EBITDA or something in between. I want to take a real hard look at those. If we can go get those at reasonable prices, then they absolutely belong as part of us. We want to do that. But then we'll look at M &A and other verticals that are, for the most part, related, but not roofing, but something that's in the same part of the cycle, of the building cycle. And we'll do acquisitions there. So we're going to do a lot of M &A. We're also going to do greenfields.

29:06So when you Google the, you come across a lot of stuff about the M &A, Like all these stories about all these 500 deals and this deal and that deal and this 11 billion and 7 billion and 3 billion. But we really made the money on the green fields. We made the money on two things. We made the money on improving the profits of the companies we bought by sticking to the playbook and doing green fields. Green fields by that I mean cold starts. Just instead of buying someone, just renting or buying some leasing or buying some space and a building and hiring some people. And it's yours from day one. It's yours from day one.

29:39So go back to the ROIC, Joe. The IC is a lot lower. The investor capital in a startup is much, much lower than paying 10 times the EBITDA to buy somebody. So we're going to do those two. So we will have M &A in our game plan, but we're also going to have these greenfields. And you look at United Rentals, for example. United Rentals, we did 200-some-odd acquisitions. We did 200-some-odd greenfields. I got a ton of press for the M &A. I don't think I got one article about the greenfields. I mean, they made a lot more money on the greenfields.

30:21For enterprise organizations, managing all your food needs is a tall order. But with EasyCater, you get a single workplace food vendor with the tools and resources to make it easy. giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform, all while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. You're thoughtful about where your money goes. You've got your core holdings, some recurring crypto buys, maybe even a few strategic options plays on the side.

31:04The point is, you're engaged with your investments, and Public gets that. That's why they built an investing platform for those who take it seriously. On Public, you can put together a multi-asset portfolio for the long haul. Stocks, bonds, options, crypto, it's all there. Plus an industry leading 3.8 % APY high yield cash account. Switch to the platform built for those who take investing seriously. Go to public.com and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com. Paid for by public investing. All investing involves the risk of loss, including loss of principal.

31:43Brokerage services for U.S.-listed registered securities, options and bonds in a self-directed account are offered by Public Investing, Inc. Member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com slash disclosure. Every business starts with an idea. How can you go from daydreamer to industry leader? Amazon Business accelerates your journey. With smart business buying, get everything you need to grow in one familiar place. From office supplies to IT essentials and maintenance tools. Amazon Business takes the buying experience you know and love from Amazon.

32:14Plus tools that help you save costs and make insights-based decisions. Ready to bring your visions to life? Learn how at AmazonBusiness.com. Can you give us, whether we're talking about deals, a little lay of the land about market share? Like how big is the space and how much market share does Beacon have and how fragmented is it and so forth? It depends how you categorize, how you count it. But generally speaking, it's somewhere between$50 and$75 billion. So it's not huge. It's not like a$500 billion TAM or a trillion dollar TAM, but it's not insignificant either. You're talking revenue. That's revenue.

32:48And then you have Beacon has 10 billion of that. So somewhere it's between 15, 20 % in that kind of range. There's two other actually very good companies. There's one called ABC, which is run by this, was chaired by this amazing woman called Diane Hendricks, who I had the pleasure of meet briefly. She probably doesn't remember me. At an event in Palm Beach that Byron Trott was having a couple of years ago. And this is a woman who's built up an amazing company. When you go to the trade shows, and I've gone to a few of the trade shows, they got the hottest booth. A lot of activity. There's a lot of energy there.

33:17It's very dynamic. It's very self-confident. It looks like a real good company from the outside. And then there's another company that a very iconic entrepreneur, similar to me in a lot of different ways, called Dan Tinker built up. It's called SRS. And they got backing from Leonard Green and from Berkshire Partners. And they built up a real nice company. They sold it for$15,$20 billion to Home Depot. So now it's part of Home Depot. But that was also a spectacular story. I mean, a real American success story where they had 20 % organic revenue growth between 2010 and 2023. I've studied a lot of industries.

33:56I've been in a lot of industries. I've not seen a lot of industries where a company can have 20 % organic revenue growth. That is very impressive between price, volume, and greenfields. Not through acquisitions. Organically. Organic revenue growth. Very, very impressive, which is why he got this great multiple when he sold it to Home Depot. America is amazing. Those two companies and Beacon together have more than half of the industry. But then there's these other companies, these independents and these smaller companies that are smaller but are really strong, feisty companies. So people have to have roofs over their heads, as we discussed.

34:31It's not a discretionary item for most people. But at the same time, I imagine if the economy slows down, if interest rates are high, then maybe construction starts to slow and you see fewer sales of roofing shingles or whatever. Give us your general read on economic activity right now. What are you seeing from your perspective as chairman and CEO of QXO, your first acquisition, but also taking into account all of your other many, many logistics businesses? So two parts to your question there. The first part is what happens to the distribution of roofing supplies and waterproofing supplies, too, because that's part of the very fast growing part of this business in a recession or an economic slowdown.

35:17For 80 percent of what Beacon does, you're still going to – it's nondiscretionary. If you have a leaky roof, you're going to fix it. And whether the economy is good or bad, that's not the point. The point is you got rain coming down into your living room. You have buckets that are getting it. You're going to change your roof. You just are. But 20 % of the business is with new construction and it is discretionary. It's something that's not just regular maintenance. And there, that would be affected by an economic slowdown. But the vast majority of the roofing business is non-discretionary. It's much less sensitive to the economic cycles than other businesses I've been in.

35:50Now, to the 20 % that's more directly affected by the economy, I don't know. we're in a situation in the economy right now where I can't point to any other history where this has happened before. So I don't have a good muscle memory to say this is what's happened the last five times we were in this situation. And therefore, that's likely what happened here. We've never had the type of economic policy and the trade policy that we've got going on right now. So we're on new territory. And I think it's evolving the policy and it's changing. And then you have reactions from the counterparties from the other countries.

36:21So I don't know how it's going to play out. I don't know how. I don't know anyone knows how it's going to play out. That's what's very interesting about it. Very fun times to be living in right now. Okay, this is a question we like to ask people who are actually doing stuff, so deal makers and people like that. But what was the hardest part of this acquisition? So I know it's still early days, but just in terms of the process so far, what did you find most challenging? So up until now, because we don't close the deal until the end of April. Up until now, when we've been negotiating to do the deals, they didn't want to sell.

36:54I mean, we just got the hand. We just couldn't get a conversation, couldn't get a meeting. I never met the CEO until last week. We just couldn't get a meeting, and they were reluctant to sell. So that was – it's kind of tough to buy a company when you don't have someone on the other side who wants to meet when they want to sell. They were proud of their company. They had a high value expectation, and they wanted to continue executing on their planet they had confidence in. So that was tough. It was tough to overcome that. I felt that the right thing to do was to make them an offer and just stick to that price no matter what happened.

37:26Now, as it turned out, Tracy, between when we made them the offer, which I think was November, and as the months progressed during the offering process, the market got worse. The economy got worse. The building products got worse. The stocks got worse. And we had people advising us saying, you know, you ought to just withdraw your offer, let their stock go down 20, 30 bucks or whatever would have gone down and come back with a much lower price. And I really struggled with that. That's just not how we roll. And yes, we would have saved some money, but it would have been, I don't know, we had ethical challenges with that.

37:58It's just not, it would hurt our reputation. And we just, we shouldn't do it. We like the price of$124 and 35 cents,$124 and 34 cents, 35 cents. It makes sense. We're going to be able to double the profits over time. So it works. We're buying at a reasonable price. But it was a challenge to figure out, do we play tough guy like a private equity guy would have done and retrade the price? Or do we just do the right thing and stick to the price? So we stuck to the price. In your life experience, does everyone have a price? Well, what do you mean by that? You know, people are like, oh, I love this.

38:29This is my family business. I would never sell it. Or I would never leave this job. I would never leave Bloomberg. I would never, whatever. Does everyone have a price? No. Some people are just so... Some people are principles. Well, it's not just principles. Some people are in love with what they're doing in life, whether it's in the arts or whether it's in academia or whether it's in business. And they just really love what they're doing. It's not a question of money. I mean, the people I know in life who are non-money people, who are just not into money, they're the people I respect the most, actually.

38:57I mean, this weekend I sponsored the Black Music Symposium at Bennington College, where I went to school 50 years ago. And it was really exciting. and one of the musicians who's a really good musician called me out I said look I think I'm still a musician even though I'm not doing music I'm doing business because I'm still improvising I'm still putting teams together and I've got harmony going on and I've got a beginning and a middle and an end but not much in between those things and it just comes to that he said well that's a bunch of crap you know you're not a musician you're not a musician you're not you're not a musician I know alright Brad Jacobs thank you so much for coming back on Odd Lots and walking us through the latest deal congratulations really a pleasure You know, this is the only podcast I'm doing.

39:36Thank you. We're cutting this clip. We're cutting this clip and running that separately. Thank you so much, Brad. Thank you.

39:55Joe, that was a really interesting conversation. We don't normally do episodes about specific transactions, but I think this one was interesting, not just from a macro perspective, but just out of the broader M &A environment, as we've been discussing, kind of lackluster recently. So it was good to talk about a big deal that has actually happened. You know what's interesting? You asked Brad about the state of the economy, and he was sort of cagey about it. But then in his next question, he talked about the environment from November to now. He's like, oh, the economy slowed. He gave a little hint there that he, there's, I mean, look, the market has slowed for sure.

40:36But a little hint about the state of the environment, maybe, in that answer. But I really like talking to Brad. It is fun. You know what's interesting? Here's something really confusing. You know that phrase, deals are my art form, other people paint beautiful. No, no, I do not know that phrase. Is this something people actually say? No, so like, there's this quote, deals are my art form, other people. paint beautifully on canvas or write wonderful poetry. I like making deals, preferably big deals. That's how I get my kicks. I always thought it was a Trump quote, but then I searched it and apparently Ed Koch said it.

41:09And now I'm really confused. Anyway, I don't know. It's a great phrase, but hearing Brad talk about the end, it's like, I'm still a musician. It's like, no, your art form is deals. It sounds like he really likes doing deals. He likes deal making for sure. Well, the other thing I was thinking, we were talking about price and that 40 % premium that they're paying for Beacon. And I had that, you know, that scene from Succession in my mind. No, because I haven't seen Succession. I know. Let's not talk about this. Go on. Wait, wait, wait. OK, so there's a scene where, you know, they're making a bid for another company and they just throw out this insane number.

41:44And the head of the media empire at that time, the sort of patriarch of the family says, congratulations on saying the bigger number. And so I always think about that when it comes down to pricing for M &A. You have to watch Succession. I can't believe it. No, no, no. That's not my thing. I did really like it. You know what's interesting? Wait, wait. No, can we talk about this another time? Not media plus business. Let's talk about this another time. I watched like four episodes and I was so bored. I was like, oh, it gets good at the eighth episode. I was like, I'm not giving that much of my life to get into a show.

42:21If it doesn't, anyway. You know what I think is really interesting is a few aspects of this deal. One, obviously that, and I didn't know this, that at least for a lot of roofing, that there is this very complete domestic supply chain. But also just this idea that as the housing stock grows, you create perpetual demand even if the housing stock isn't really growing because roofs have to be replaced. And that stat that actually 80 % of the business of roofing is non-discretionary, I thought was pretty interesting just thinking about like at any given time, most of the demand for roofing equipment is existing homes that need to upgrade or fix something.

43:02No one gets a new roof for fun. And I know that from experience. Yeah. Except maybe Brad. I could see it. Just to test his new business. He gets a new roofing company for fun. That's right. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow Brad Jacobs. You can check him out, I think, on LinkedIn. Follow our producers, Carmen Rodriguez at CarmenArmond, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. For more Odd Lots content, go to Bloomberg.com slash Odd Lots, where we have all of our episodes in a daily newsletter.

43:41And if you want to chat with fellow listeners 24-7 about topics, including things like residential construction, go to our Discord, discord.gg slash oddlots. And if you enjoy Oddlots, if you like it when we talk about big deals in the market, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

44:20Thank you.

44:45managing all your food needs is a tall order. But with EasyCater, you get a single workplace food vendor with the tools and resources to make it easy, giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform, all while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. This podcast is brought to you by FedEx, the new power move. Hey, you know those people in your office who are always pulling old school corporate power moves like the guy who weaponizes eye contact.

45:29He's confident. He's engaged. He's often creepy. It's an old school power move, but this alpha dog laser gaze won't keep your supply chain moving across borders. The real power move? Having a smart platform that keeps up with the changing trade landscape. That's why smart businesses partner with FedEx and use the power of digital intelligence to navigate around supply chain issues before they happen. Set your sights on something that will actually improve your business. FedEx, the new power move. This is Tom Keene inviting you to join me for the Bloomberg Surveillance Podcast. It's about making you smarter each and every business day.

46:12We bring you a recap of what happened overnight in Europe and Asia, the day's economic data, and complete coverage of the U.S. market open. We cover stocks, bonds, commodities, currencies, even crypto, all the information you need to excel. Bloomberg Surveillance also brings you the analysis behind the headlines. We do that with lengthy conversations with our expert guests, The smartest names in economics, finance investment, and international relations. We do all this live each and every weekday that bring you the best analysis in our daily podcast. Search for Bloomberg Surveillance on YouTube, Apple, Spotify, or anywhere else you listen.

46:54On the East Coast, listen at lunch, and on the West Coast, when you wake up. That's the Bloomberg Surveillance Podcast with me, Tom Keen, along with Paul Sweeney and Lisa Mateo. Subscribe today wherever you get your podcasts.