BREAKINGVIEWS-Shopaholic Brad Jacobs engineers a novel bargain

By Jonathan Guilford

NEW YORK, Feb 12 (Reuters Breakingviews) - Nothing begets success like more success. Brad Jacobs, the quotidian M&A veteran, is using the formula for his latest deal at fledgling construction-supplies rollup QXO QXO.N. The $2.3 billion acquisition of lumber distributor Kodiak Building Partners includes payment using shares the buyer can repurchase later at a set price. This novelty, if it works, would add ever-cheaper fuel to his acquisition campaign.

Having previously built United Waste Systems, United Rental and XPO with deal sprees in sanitation, worksite equipment and logistics, respectively, Jacobs brings a formidable track record to the negotiating table. XPO's XPO.N shares, for example, have gained nearly 400% over the last five years, quintupling the S&P 500 Index’s .SPX return.

Part of the Jacobs approach is to jealously guard shareholder registers. His own private equity outfit owns 49% of QXO's common shares and a slug of preferred stock, with backers such as Orbis Investment Management also holding big chunks. Instead of paying for deals with equity and diluting this careful work, Jacobs has instead raised a big pot of cash, not unlike a buyout fund.

QXO's publicly traded stock makes for tempting currency. The Kodiak purchase price is roughly equivalent to its revenue last year, while QXO's investors value the $19 billion company at nearly three times trailing sales. This disparity makes equity cheap to use. Moreover, deals for private companies often include sweeteners contingent on the target’s performance. A chance to hop on the Jacobs bandwagon instead is an attractive substitute.

In this case, QXO is paying with 13 million shares alongside $2 billion of cash. At QXO’s stock price before the deal was unveiled on Wednesday, it's an extra $300 million. Kodiak's mooted new owner, however, reserves the right to repurchase shares now trading at about $27 apiece for $40 any time it wants.

This caps Kodiak’s upside at about $220 million. The seller takes some extra risk on QXO's ascendancy. If Jacobs does well, however, his company benefits twice over.

QXO stock is economical currency today, but if the share price exceeds $40, buying it back at that price would make it cheaper still. It’s not a gambit for widespread use. For a shopaholic like Jacobs, though, engineering bargains is his business.

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CONTEXT NEWS

Building-materials company QXO said on February 11 that it had agreed to buy peer Kodiak Building Partners from Court Square Capital Partners for $2 billion in cash and 13.2 million QXO shares.

QXO retains the right to repurchase the shares, which are trading at about $27, for $40 apiece.

Morgan Stanley and Wells Fargo are advising QXO while RBC Capital Markets and KeyBanc Capital Markets are advising Kodiak.