Cash deal will keep Stock alive

The building supplier goes into bankruptcy, but with a plan

Staff WriterMay 7, 2009 

— Stock Building Supply, the struggling construction-materials giant, is seeking bankruptcy protection and getting a cash infusion from a California turnaround firm as part of a deal that saves thousands of jobs and spares a homegrown company from extinction.

The Gores Group, a private equity group that specializes in fixing up promising companies, paid an undisclosed sum for a 51 percent stake in Stock, which is based in Raleigh. Stock's British parent, Wolseley PLC, said in March that if it couldn't sell or find a partner for the money-bleeding division by August, it would close the company.

The joint venture, announced Wednesday, allows Stock to live on, and positions the company to rebound in the housing market. The deal "will allow Stock to emerge financially stronger from this economic down cycle," Wolseley CEO Chip Hornsby said in a prepared statement.

Wolseley, a global distributor of heating and plumbing gear, was under pressure to unload Stock as it sought to reduce losses tied to the beleaguered U.S. housing market.

Stock, founded in Raleigh in 1922 as Carolina Builders and acquired by Wolseley in 1986, ballooned to at least 322 branches by gobbling dozens of smaller competitors across the country. The company, like other construction suppliers, is struggling with the biggest housing slump in more than six decades. The downturn is hurting sales of windows, roofs, paneling and other housing materials.

Stock lost $246 million during the 2008 fiscal year that ended July 31, down from the $86 million in profit reported during the previous year. Analysts didn't expect Stock to break even until 2011.

After efforts to sell Stock failed last year, Wolseley tried to keep the company alive through cuts, hoping to outlast dying competitors until recovery surfaces. It laid off 3,000 Stock employees and closed 86 facilities. As of March, the company had about 200 branches and 8,500 employees, fewer than half what it employed in 2006, atop the market.

Despite the cuts, the company's losses were putting Wolseley in danger of violating loan terms with lenders. In the first half of the current fiscal year, which ended Jan. 31, Stock lost $129 million. Selling its controlling interest in Stock gives Wolseley $564 million in additional breathing room between its debt covenants.

"The news on Stock removes the major uncertainty within the business," Numis Securities analyst Howard Seymour wrote in a note to investors. The deal "removes the concern that closure would have been a long, drawn out and costly process."

Wolseley plans to focus on Ferguson, its North American plumbing and heating supply business. Under the new arrangement, it will keep a 49 percent interest in Stock, and offer a $100 million loan to help Stock in the transition. Wolseley, which will keep two of seven board seats in the new Stock, also will keep the company's construction loan business before phasing it out. That operation is still owed $391 million from builders.

That's a relief

That relieves a big burden for Stock, which will continue under the Stock Building Supply name and retain the same management team. But the company still has some work ahead. Stock filed for Chapter 11 bankruptcy protection in Delaware on Wednesday as part of the deal. Under bankruptcy laws, the company can easily shed expensive leases and more easily pay creditors.

"Stock's operations will continue as usual during the [bankruptcy] filing and beyond," the company said. "Employees will continue to receive their salaries and benefits and Stock will pay in full all vendor obligations."

Gores, a 22-year-old private equity firm focused on acquiring controlling interests in mature and growing businesses, will invest an additional $200 million once the bankruptcy is complete in about 60 days.

Gores identifies companies that it thinks can benefit from its operating experience and cash. The firm has acquired at least 60 companies worldwide. It has expertise in technology, telecommunications, business services and industrial companies, but limited experience in construction.

"Stock presents a compelling investment opportunity, particularly at this point in the economy," Gores' managing director Ian R. Weingarten said in a statement. The streamlining already conducted by Stock, plus Gores' focus on revamped operations "will position the business to achieve its full potential."

Locally, Stock has cut at least 170 workers this year. Statewide, the company has eliminated at least 1,700 jobs in 18 months, including at least 700 this year.

Stock now has about 1,400 North Carolina employees, including 850 in the Triangle. The company will continue to make "labor adjustments" according to market demand, said spokeswoman Shari Leon. That means more uncertainty for Stock employees, even under a new owner, if the housing market doesn't rebound soon

"Gores' strong operational expertise and focus will help position the company during this unprecedented downturn and to outperform the market," Stock President Joe Appelmann said in a statement.

Bloomberg News contributed to this report. or 919-829-8917

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