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Armstrong World Industries, which announced that it would explore strategic alternatives on 15 February, is leaning towards an asset sale to fund a share buyback, a buyside source and a source familiar with the situation told dealReporter. Responses from both sources and a person who had looked at the company at one point during its strategic review, indicated uncertainty as to whether a deal would be struck in the short term. However, the buysider did comment that there is a possibility an announcement would come before year end. While a buyback using the proceeds from an asset sale is one option being explored, it is also possible that no transaction eventuates, and the strategic review is put on hold until a more appropriate time, it was said.
Asked whether he thought a sale of the entire company was still a negotiable alternative, the buysider responded with skepticism, saying that this could only happen in the unlikely scenario that a consortium was formed.
“There is some competition over one asset which could get a very decent premium, and I can see the company going with that scenario,” said the buysider, without identifying the business garnering interest. According to a previous report by this news service, Armstrong’s ceiling business is the stronger part of the company and was seeing the most interest in the earlier days of the auction process. Meanwhile, the flooring business, which is more exposed to the residential construction market, is currently “struggling”, said the person who had looked at the company. This person, although no longer involved in the process, doubted that the company would sell the stronger ceiling business, given its status as the “crown jewels” of the company.
The person added that the market had inflated expectations when the company announced strategic alternatives, driving Armstrong’s share price into the mid-50s range earlier this year, prior to the deterioration of the credit markets. “Nobody I ever talked to thought [Armstrong] was going to get [USD] 50 a share for the sale, and that was when you had the best financing markets in the last 20 years,” he said.
The company “missed an opportunity to do a financial sponsor transaction,” the person added, and will now need to find a buyer that will not need to rely on the high yield market. Berkshire Hathaway had submitted an offer to acquire all of Armstrong, but the target saw the bid as too low, the person claimed to have heard. However he conceded that he did not have direct visibility or insight into the process anymore, and there is a chance the company has revisited negotiations with Berkshire after other interest did not eventuate.
The buysider added that another factor hindering the chances of a deal getting done is the heavy influence of the Asbestos Personal Injury Settlement Trust. The trust, which holds approximately 66% of Armstrong’s outstanding common shares, retained Merrill Lynch as an advisor upon the initiation of the strategic review.
Armstrong World Industries closed trading today at USD 41.92. The person who had looked at the business, said that in his opinion today’s trading level values the company at a relatively full price. Lofty expectations on the sellside make a sale for the entire company a challenging task, he said.
Armstrong World Industries and Berkshire Hathaway spokespeople did not return calls.
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