Ahead of Wednesday’s Nasdaq stock market opening, distribution aspirant QXO, Inc. made a very public overture to acquire all outstanding stock of Beacon Building Supply for $11 billion in cash, listing several ostensible upsides for Beacon shareholders in a letter sent to Beacon's Chairman of the Board that was also released to the media.
By early afternoon, Beacon, through a newly engaged relationship with powerhouse New York public relations firm Joele Frank, Wilkinson Brimmer Katcher, gave QXO and its founder Brad Jacobs a very public response: ‘Thanks, but no thanks.’
An annotation at the end of the QXO offer and Beacon's hiring of Joele Frank, a financial and crisis communications firm, suggests neither side sees this as the final decision on Beacon's acceptance of the offer or that QXO has lost interest in acquiring the supplier.
Since mid-November 2024, the challenges facing the two companies — a leading distributor in the building envelope sector and a financially strong firm with top executives — have captured the attention of the roofing industry.
Showdown
Like poker, where bluffing plays a crucial role, mergers and acquisitions also rely on subtle tactics. Eventually, a player will demand a showdown, forcing their opponent to reveal their cards.
QXO, which first approached Beacon last November about an acquisition, has spent the previous 60-some-odd days working on a deal enticing enough for Beacon to say yes and agree to be purchased. On Wednesday, QXO’s founder and CEO, Brad Jacobs, called the showdown, bringing John Q. Public along for the play.
In a letter sent to Stuart A. Randle, Beacon’s chairman, Jacobs offered to pay $124.25 per share in cash to acquire all the supply distributor’s outstanding stock, translating into a nearly $11 billion transaction value; Beacon’s market cap stands at $6.74 billion.
According to the letter, the offer price was based on a 90-day unaffected volume-weighted average price (VWAP) of $91.02.
In layman’s terms, VWAP refers to the average price at which a company's stock has traded over a specific period, typically a few days or weeks, excluding any periods of unusual trading activity. The formula is a standard metric used in finance that calculates the average price of a stock over a period, giving more weight to trades with larger volumes.
"Unaffected" signifies that the VWAP calculation excludes periods when the stock's trading volume or price was significantly impacted by factors unrelated to regular market activity.
Since Nov. 18, 2024, the day news leaked of QXO’s interest in buying Beacon, the average daily trading volume of Beacon shares has jumped nearly 32%, suggesting heightened investor interest or activity. That day alone, the trading volume on Beacon shares jumped by 350%.
At the beginning of 2024, Beacon was trading at $78.76 per share, and for the first 220 days of the year, the average price per share was approximately $93.37. After Nov. 18, the average share price jumped to $102.85, an increase of 10%.
On Tuesday, Beacon closed at $108.85. Yesterday, in early hours trading, the stock reached its 52-week high of $121.22 before giving back 3.3% to end the day at $117.18. The stock is still up 7.65% from the previous close on more than 6.2 million shares traded. For perspective, Beacon’s average daily volume is somewhere around 661,000 shares.
Jacobs' offer of $124.25 per share represents a 37% premium on the 90-day VWAP amount. Even at its 52-week high — which is unlikely to have staying power according to analyst reports from Yahoo Finance, Zacks Investment Research or Moody’s — the amount QXO offers remains more than two points higher.
QXO’s Rationale
Jacobs has positioned the offer as a “significant and immediate value” opportunity for Beacon’s shareholders. According to QXO’s letter, the proposed $124.25 per share represents a “notable premium,” including 26% above Beacon’s last unaffected trading price and 17% above its VWAP all-time high share price. Jacobs emphasized the company’s financial readiness, with more than $5 billion cash on hand and secured financing to fund the acquisition fully.
The letter to Beacon’s chairman pulled no punches: QXO highlighted Beacon’s historical underperformance relative to its peers, citing lower revenue growth and EBITDA margins. The company also asserts that macroeconomic headwinds, including rising interest rates and market uncertainty, further challenge Beacon’s ambitious growth targets under its ‘Ambition 2025’ strategic plan.
“Beacon has failed to optimize value for shareholders,” the letter stated, adding:
- “Beacon has reported a revenue [compound annual growth rate] of 8% from 2019-2023, trailing all of the building products peers from the group cited in your proxy;
- “Consensus forecasts currently expect Beacon to fall short of key elements of your Ambition 2025 plan. Notably, consensus calls for 2025 EBITDA margin of 9.8% versus your plan’s target of 11%;
- “Beacon’s balance sheet lacks the capacity to pursue transformational M&A;
- “Beacon does not have diversified operations and exposure to high-growth categories that trade at higher multiples, [and];
- “Beacon’s trading multiple has remained range-bound for the better part of a decade, and its valuation trend has lagged peers. Beacon’s unaffected EV/ NTM EBITDA multiple stood 4.1x below the subset of building products peers in its proxy, a 30% discount. This has widened out from an average 2.8x gap, representing a 23% average discount over the preceding five years.”
In simple terms, QXO says Beacon is undervalued relative to its peers, does not have the financial wherewithal to transform itself as the industry evolves, and has not achieved the benchmarks it outlined in its highly touted Ambition 2025 plan.
What Say Beacon?
“Beacon’s Board of Directors thoroughly evaluated the proposal. Following its review, the Board unanimously rejected the proposal and determined that it significantly undervalues the company and its prospects for growth and future value creation,” the company stated in its response mid-afternoon Wednesday.
Randle emphasized Beacon’s strong financial performance, including a total shareholder return exceeding 200% over the past five years. The statement cited the company’s differentiated business model, operational excellence, and proprietary digital tools like Beacon PRO+ as critical drivers of future value creation.
Beacon also criticized QXO’s lack of engagement, noting that QXO declined to sign a standard non-disclosure agreement necessary for sharing detailed financial projections. The board contends that this refusal undermined QXO’s valuation efforts and engagement credibility.
“Importantly, Beacon has acted in good faith to engage with QXO to show them a path to value in a timeframe that would preserve their rights and flexibility,” Randle said. “However, QXO has refused to improve its first and only proposal, which the Board determined significantly undervalues the company.”
The chairman added that the board “remains open to all opportunities to maximize shareholder value and is fully committed to acting in the best interests of Beacon and all of its shareholders.”
Beacon’s president and CEO, Julian Francis, also refuted QXO’s assertions of poor performance relative to its peers, saying, “Beacon is delivering above-market growth, driving operational excellence and building a winning culture. These achievements have enabled us to create a differentiated business model with multiple paths to success, margin expansion and value creation.”
The letter also sought to mollify shareholders by stating that at its upcoming shareholder Investor Day, scheduled for March 13 in New York City, the company looks forward to “discussing … how we will enter our next chapter of growth, including our new long-term goals.”
What's Next?
Beacon plans to outline its 2028 long-term financial targets at the annual shareholder meeting and reaffirm its commitment to delivering shareholder value. But where does that leave QXO?
Language at the end of QXO’s letter, tucked within the requisite boilerplate language that often accompanies financial disclosures, is the proverbial shot across the bow for Beacon:
“QXO and the other participants intend to file a preliminary proxy statement and accompanying WHITE universal proxy card with the Securities and Exchange Commission to be used to solicit proxies for, among other matters, the election of its slate of director nominees at the 2025 annual meeting of stockholders of Beacon Roofing Supply, Inc., a Delaware corporation.”
A source close to QXO said the company plans to file the required paperwork by Feb. 14, the deadline for submitting a slate for shareholders to vote on Beacon’s board of directors. In other words, a proxy fight is brewing.
Jacobs stated that QXO’s offer is a “compelling price” for Beacon shareholders. He also let it be known that QXO has the deep pockets, transaction experience and institutional knowledge needed to “consummate the proposed transaction expeditiously and with a high level of certainty upon reaching a definitive agreement.”
Trying to soften the rhetoric before ratcheting it back up, Jacobs added that QXO is available to meet “at short notice” to make the deal happen. But, if not, “We intend to let your shareholders decide whether they want our compelling offer,” he wrote.
The Big Picture
As my colleague Chris Gray had extensively reported, the building materials sector has seen significant merger and acquisition activity over the past year. As companies seek scale and efficiency in a fragmented market, QXO’s lack of prior operations in the roofing and building products distribution space raises questions about its ability to navigate the sector’s complexities effectively.
But, as Lilli Tillman Smith, an industry analyst with Principia, points out, a lack of prior operations in and of itself will be forgiven by investors if the underlying fundamentals are in place, most notably a track record of leadership and success, citing The Home Depot’s acquisition of SRS Distribution as an example.
“I do think that people are looking at The Home Depot differently,” she said of initial skepticism that a Big Box retailer could be successful in the wholesale side of the building envelope. “Many people were like, ‘I don't know, now that [SRS is] owned by Big Box, what does that mean?’ But from what I see, Home Depot will look a lot more appealing to the pro-market and more credible.”
While Beacon is the largest publicly traded distributor in its category and commands a significant market presence, it does face competitive pressures and macroeconomic uncertainties, as reflected in its last earnings report.
For Beacon shareholders, the QXO offer provides a near-term premium amidst a volatile economic environment. While Beacon’s demonstrated resilience and strategic initiatives could yield higher long-term returns, the market is mixed on what long-term means.
Zacks Investment Research writes that while Beacon’s earnings estimates for 2025 have moved north in the past 60 days, higher operating and acquisition-related expenses are a concern. During the first nine months of 2024, adjusted operating expenses increased $180 million YoY to $1.38 billion from a year earlier. Additionally, increased employee benefits and expenses related to greenfield and acquired locations will continue into at least part of 2025.
Battle Royale?
The standoff between QXO and Beacon underscores a tension between immediate value realization and long-term strategic growth. If QXO pursues a proxy fight, the ultimate arbiters may likely be shareholders. Jacobs has expressed readiness to nominate directors to Beacon’s board if necessary, advocating for shareholders’ rights to evaluate the proposal directly.
As the building materials sector evolves, the resolution of this high-profile bid may likely have lasting implications for industry dynamics and shareholder activism.