Skyline Champion to Acquire Regional Homes
Sky acquires Regional Homes
SKY 0.00%↑ has just announced its plans to acquire the 4th largest HUD manufacturer, Regional Homes (‘ReG’) for $458M (Purchase Price of $328M and assumed debt of $130M).
Source: Sky, Acquisition presentation
Regional Homes will add 3 manufacturing facilities (on top of the current 44) but will also add 43 retail locations. Currently, SKY operates under 31 retail locations thus expanding its retail and direct to customer presence.
Homes sold in 2022 by ReG are ~5,000 with estimated revenue of $523M. Houses sold are ~19% of the units sold by SKY so the transaction, all else equal, will increase market share from 20.4% to approximately 24.3%.
Regional Homes has ~1,200 employees translating to $435.8k revenue per employee. In contrast, SKY’s similar metric is $338.5k (for FY23).
SKY looks for procurement synergies and digital marketing leverage while it also expands its presence in Alabama which is the 3rd largest state for manufactured housing (according to transaction presentation). SKY also plans to increase penetration in the market.
ReG EBITDA margin stands at 16% Vs 20.9% for SKY in FY23 & 14.6% for CVCO (Cavco Industries) in FY23. Even though the deal appears margin dilutive, ReG is still more profitable than the #3 player (CVCO). As per the acquisition call, transaction will be 40-60 bps margin dilutive in the next 6 months to 12months post close.
On a Trailing Twelve Months basis, ReG revenue is expected to be 10-12% lower (than $523M in FY22) due to softening market. EBITDA is expected to be fairly even, driven by the government related business. It could go down a bit in the short term.
“No. I mean their core business is going to have a little bit of a pullback [on EBITDA], Dan, but it's offset by some of the government-related business that they had. So I expect it to smooth out, maybe down a little bit, but then kind of it's in recovery mode back to where they were.” Mark Yost, Skyline Champion Corporation CEO
Transaction EBITDA multiple stands at 5.5x (excludes earn-out of ~$25M relating to future government contracts) which is lower than 6.6x of CVCO 0.00%↑ and 6.1x of SKY.
Source: Sky, Acquisition presentation
Estimated Returns on Capital (based on 2022 figures) and total purchase price is estimated at 13.8%*, which is below 22.8% (per Koyfin) of SKY on a TTM basis.
* Net income before taxes of $70.7M plus net interest expense of $9.2M, multiplied by 1-tax rate of 21%, resulting to estimated net operating profit after tax of $63.1M. NOPAT ($63.1M) over invested capital of $458M results to 13.8%.
In case you are worried about the financial position of SKY, the below quote from the call will address your concerns as the company has a strong balance sheet.
“As a reminder, we ended our first quarter of fiscal 2024 with approximately $798 million of cash and cash equivalents and an undrawn revolving line of credit of approximately $166 million.
If we were to include the Regional Homes transaction and recently announced investment in ECN as of quarter end, our liquidity position would still have exceeded $375 million.” Laurie Hough, CFO
Concluding thoughts
Comparing transaction multiple of 5.5x to trading multiples of 6.1x for SKY and 6.6x for CVCO, the price to be paid seems fair. Additionally, the returns on capital, despite being lower than SKY’s existing returns, are above its cost of capital, so at first glance the acquisition is value adding.
Additional sources:
Prior StockOpine articles on SKY:
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