HDI Announces US$303 Million Acquisition of Novo Building Products Holdings, LLC and New Credit Facility

Expected to be over 30% accretive to earnings per share on a pro forma basis

Acquisition provides HDI turnkey entry into the home center and home builder distribution customer channels, with high value architectural building products, established brands, a national footprint, and leading market positions

Hardwoods Distribution Inc. (“HDI” or the “Company”) announced that it has, through its subsidiary, entered into an agreement (the “Equity Purchase Agreement”) to purchase Novo Building Products Holdings, LLC (“Novo”) from an affiliate of Blue Wolf Capital Partners for a total price of US$303 million (the “Purchase Price”) (the “Acquisition”). Novo is being acquired on a cash-free and debt-free basis other than the assumption of an estimated US$40 million in lease obligations. The Acquisition will be financed by a new credit facility.

Novo is a leading U.S. distributor of architectural grade building products to home centers and to home builder distribution yards (“Pro Dealers”) across the U.S.. Novo’s product suite includes moulding and millwork, stair systems, decorative boards, and doors which are complementary to the Company’s own offering.

“We are very excited to be adding Novo to HDI. This highly strategic acquisition provides a symbiotic fit with our existing operations as a distributor of high value, specialty, non-commodity building materials with a national footprint and leading market position,” commented Rob Brown, HDI’s President and CEO. “The acquisition advances our strategy of growing market share and expanding our product offering and customer channel participation in the architectural building products industry. In addition, Novo deepens our presence in the attractive residential and repair and remodel markets where we expect a multi-year runway for growth. We look forward to welcoming the talented Novo team to HDI and working together to ensure a smooth integration planning process.”

Acquisition Highlights

1.Turnkey entry into the home center customer segment. Approximately half of Novo’s revenue is derived from being a primary supplier to national and regional home improvement retailers. Novo is a critical product category manager for its home center customers in both physical and digital store aisles. Services provided include individual store planning, logistics and supply chain management, marketing and merchandising, e-commerce, and in-store stocking and material handling. Novo’s relationships with key home center customers span decades.

2.Turnkey entry into the Pro Dealer customer segment. Approximately half of Novo’s revenue is derived from the Pro Dealer segment. Novo has achieved preferred vendor status with many Pro Dealers and believes there is a significant opportunity to increase Novo’s market share in this attractive segment.

3.Significantly enhances the size and scale of the Company, with no overlap. With more than 1,400 employees and operating 14 locations with a strong eastern U.S. presence, Novo’s footprint complements that of HDI. Novo anticipates generating annual revenues of over US$640 million and annual EBITDA of over US$55 million in 2021.

4.Skilled operational leadership team. Novo has a committed and strong management team. Key management have significant industry experience and will continue to lead the Novo business as part of HDI, further adding to the Company’s bench strength.

5.Accretive with further upside from expected synergies. The Acquisition, if completed, is expected to be over 30% accretive to earnings per share before accounting for any synergies. Management has identified potential synergies, including supply chain, information technology, tax and logistics that are expected to provide further upside to the accretion.

6.Efficient use of the Company’s debt capacity. The Purchase Price will be funded through an increase in borrowing, which in turn, is expected to improve the efficiency of the Company’s balance sheet. The Company expects to have a pro forma bank debt to Adjusted EBITDA after rents ratio (or “Leverage Ratio”) of less than 3.0x by the end of the year, and further expects to have significant unused borrowing capacity available to it on close of the Acquisition.

“Novo represents our tenth acquisition in the last five years, and on a pro forma basis we have acquired over US$1.1 billion in annual revenues during this time period. We continue to see significant opportunities to complement our strong organic growth with acquisitions, and will continue to apply our proven formula for identifying, assessing, and integrating targeted opportunities,” comment Mr. Brown.

Novo Purchase Agreement

The Company, through its subsidiary Hardwoods Specialty Products US LP, has agreed to purchase Novo for the Purchase Price, subject to a working capital adjustment.

The obligation of the parties to complete the Acquisition is subject to various conditions typical of those contained in equity purchase agreements negotiated between parties dealing at arm’s length, including that the applicable waiting period relating to the Acquisition under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (including all extensions thereof) has expired or been terminated.

The Equity Purchase Agreement contains various termination provisions typical of those contained in equity purchase agreements negotiated between parties dealing at arm’s length, including a provision that either party may terminate the agreement in the event that, subject to certain conditions, the closing of the Acquisition has not occurred by August 22, 2021.

Credit Facility

HDI has received a commitment letter from its existing lender Bank of America, N.A. (the “Lender”) for a new senior secured credit facility (the “New Credit Facility”) of up to US$525 million. The New Credit Facility will replace the existing credit facility for HDI’s Canadian subsidiary and the existing facility for HDI’s U.S. subsidiary. The New Credit Facility is expected to consist of (i) a revolving credit facility of US$225 million which can be drawn upon in U.S. dollars and Canadian dollars, (ii) a term loan of up to US$225 million, and (iii) a term loan of up to US$75 million. HDI will need to enter into the New Credit Facility before it will be in a position to consummate the Acquisition.

The New Credit Facility is expected to bear interest at a rate equal to LIBOR plus up to 2.25% or the base rate of interest charged by the Lender from time to time (“Base Rate”) plus 1.0%. The LIBOR and Base Rate margins for the New Credit Facility are expected to be subject to performance pricing adjustments, from time to time, based on the Company’s then applicable leverage ratio.

The financial covenants under the New Credit Facility are expected to include, among others: (i) a consolidated interest coverage ratio (a ratio of adjusted EBITDA to total interest expense, determined on a consolidated basis of the Company, with the specific definitions to be agreed upon) and (ii) a consolidated leverage ratio (a ratio of total funded debt to adjusted EBITDA, determined on a consolidated basis of the Company, with the specific definitions to be agreed upon).

The commitment letter and advance of the loan facilities are subject to usual conditions including, among others, execution of documents satisfactory to the Lender, completion of the related transactions on terms satisfactory to the Lender, no material adverse change in the business of the Company and its subsidiaries or the sellers of Novo having occurred, delivery of certain interim financial statements, pro forma financial statements and a pro forma compliance certificate confirming compliance with financial covenants and borrowing base on a pro forma basis, receipt of all necessary consents for the Acquisition and completion of the Lender’s due diligence.

Conditions to Complete the Acquisition

Completion of the Acquisition is subject to a number of conditions, including U.S. antitrust approval, as well as other conditions customary for a transaction of this nature.

The Acquisition is expected to close in late July or early August 2021.

Advisors

Cormark Securities Inc. is acting as financial advisors to HDI and provided a fairness opinion to the board of directors. Osler, Hoskin & Harcourt LLP is acting as Canadian counsel to the Company and Stoel Rives LLP is acting as U.S. counsel to the Company.

About Novo

Novo is a value-added distributor and manufacturer of specialty building products. Novo supplies mouldings, stair parts, doors, and other specialty millwork products to customers throughout the United States and in parts of Canada and Mexico. Novo operates out of 14 facilities, primarily in the Eastern and Midwestern U.S., Florida and Texas. The company’s divisions include Empire Moulding & Millwork, Southwest Moulding & Millwork, Ornamental Decorative Millwork, LJ Smith Stair Systems and Novo Direct.

About HDI

HDI is currently one of North America’s largest distributors of non-structural architectural grade building products to the residential, repair and remodel, and commercial construction industries. The Company currently operates a network in North America of 70 distribution facilities.

Contact:

Faiz Karmally – Chief Financial Officer – fkarmally@hdidist.com – (604) 881–1982

Source: Hardwoods Distribution Inc.