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Behind the BFS-BMC Merger: CEO Changes, Covid Concerns, and a Rival 'Party X'

By Craig Webb

Surprising as the news might have seemed at the time, the Aug. 27 merger announcement combining Builders FirstSource (BFS) with BMC capped an effort that stretches back to April 2018 and that featured a rival suitor for BMC, documents submitted in relation to the deal reveal.

The filing to the Securities and Exchange Commission alters one's perspective about the deal's origin. It wasn't triggered by this year's pandemic or Chad Crow's planned departure from BFS. Instead, the process started two years before, shortly after BMC said goodbye to its CEO, Peter Alexander, and revealed a change in strategy. It's also clear from the filing that BFS was the deal's instigator. And if it weren't for Covid, the merger likely would have been announced much earlier this year.

The first date given in the filing's section is March 29, 2018, when BFS retained Rothschild & Co. as a financial advisor. BFS did this "in connection with the ongoing review by the BFS board of directors of potential strategic opportunities," the filing said. That review was taking place the same quarter in which BMC announced both Alexander's departure and a decision to "pivot the organization to accelerate our strategic plan" in which it would "more fully leverage our national business portfolio and growth opportunities."

David Keltner took over as BMC's interim chief, and it was Keltner who took Crow's call on April 30, 2018, to discuss a potential transaction involving BFS and BMC, the filing reported. That was followed on May 17 with a letter from Crow to Keltner expressing interest in a meeting.

On June 16, 2018, Crow and BFS board chairman Paul Levy met face-to-face in Chicago with Keltner and David Bullock, then BMC's board chair. Three weeks later, on July 6, BFS proposed to buy BMC for $25 to $26.50 per BMC share--a 17% to 24% premium over BMC's price that day of $21.30. BMC considered the offer, but on Aug. 9 told BFS it was rejecting the proposal without making any counteroffer or calling for more talks.

David Flitman

Nineteen days later, on Aug. 28, BMC announced it had picked David Flitman to be the company's new CEO. He took over on Sept. 26 and settled in.

2019 saw a new prospect enter BMC's life. "From August 2019 through mid-February 2020, BMC explored a potential cash-and-stock acquisition of a company in the lumber and building materials distribution industry, which company is referred to as Party X," the filing said. The discussions were serious enough for BMC to retain a financial advisor, Moelis & Co.

January and February 2020 saw action over at BFS, too. On Jan. 13, the Dallas-based dealer announced that CEO Chad Crow would retire this year, once a replacement was picked. The next day, according to the filing, BFS' Levy called Bullock "and expressed an interest in discussing the merits of a potential transaction." Levy and the BFS board followed up on Jan. 31 with a decision to make a non-binding proposal of a deal with BMC.

The foursome of Levy, Crow, Flitman, and Bullock met on Feb. 4. That's when BFS said it not only was interested in pursuing a deal, but also that--given Crow's planned retirement--it would consider Flitman as the potential president and CEO of a combined company.

BMC's board met two days later to discuss the offers from both Party X and from BFS. Nearly a week after that, on Feb. 11, Levy proposed a deal that implied a value for BMC of $36 to $38 per share. That represented a premium of roughly 21% to 27% over BMC's price at the time.

On Feb. 13, BMC's board of directors gathered to consider the proposals from BFS and Party X as well as a stand-alone option. It decided to pursue deals with both BFS and Party X.

On Feb. 16--one day after the CFOs of both companies met to discuss potential cost-savings and synergies from a merger--BFS submitted a new cash-and-stock proposal with an implied value of $38 to $38.50 per BFS share. And BFS board gave Levy freedom to bid up to $40.

BMC's board met Feb. 17 to review the BFS and Party X proposals. Flitman told the directors that management concluded there was less risk involved in achieving operational synergies if it combined with BFS than if it did a deal with Party X. BMC told Bullock to solicit BFS' best and final offer ... and say BMC's directors expected an implied value of $40 per BMC share. Bullock passed the news to Levy in a telephone call that afternoon.

Levy huddled with BFS' board and the company's advisers, then called Levy with a non-binding proposal involving a cash-and-stock offer worth $40 per share. That night of Feb. 17, BMC's board reconvened, decided it liked BFS' offer, and authorized BMC's management to take the necessary confidentiality and legal steps toward negotiations. Those were signed by Feb. 20. On that same day, BMC cut off talks with Party X.

BFS (red) and BMC (blue) yards in the continental U.S.

Information swapping and other due diligence work took up much of the next few weeks. But then another problem cropped up: Covid-19. The coronavirus pandemic was tanking the economy, leading the S&P 500 to shrink 51% between Feb. 19 and March 23. BMC's shares declined by roughly the same amount, to $15.27 as of March 23, while BFS share price shrank by 61% over that same period.

By March 6, Levy and Bullock were talking about Covid's impact on the potential deal. That same day, BMC's board decided to end the talks.

It took until May 27--after Covid's initial impact had passed and demand for construction products had shot up--before Levy called Bullock to say BFS wanted to negotiate once again. BMC's board met two days later and decided to leave open the idea of a transaction while it focused on navigating Covid's challenges.

On June 6, Levy wrote to Bullock proposing a merger that would give BMC shareholders 1.28 shares of BFS common stock for every share of BMC stock. That was only about a 10.4% premium, but BMC's transaction committee discussion noted such a structure "would afford BMC's stockholders and opportunity to meaningfully participate in any value creation arising from a potential transaction." And to sweeten the deal, BFS said Flitman would be CEO of the combined company. (To help avoid any potential conflict of interest, Flitman refrained from discussing terms for his potential employment until months later, when the deal was far enough long that BMC's board said he could start talks.)

BMC reviewed the proposal over the rest of June, with Bullock eventually telling Levy on June 29 that more due diligence was needed. Levy agreed, and various parties went to work through Aug. 5, examining among other things how both companies had fared during the pandemic.

On Aug. 7 James O'Leary, who had succeeded Bullock as chair of BMC's board, met with Levy. The BFS chair said his company was open to giving 1.3 shares of BFS stock for every BMC share. Levy also said BFS assumed the combined company would be headquarters at BFS' location in Dallas, would keep the BFS name, and would have a 12-member board in which BMC directors would hold five seats. O'Leary talked with his transaction committee, then phoned Levy back to say BMC was fine with the board, HQ and name but wanted 1.35 shares of BFS common stock per BMC share. Levy countered later that day with a 1.3125 exchange ratio.

That afternoon of Aug. 7, after concluding BFS wouldn't go higher than 1.3125, BMC's board told O'Leary to complete the due diligence and negotiate a definitive transaction. BFS' board agreed on Aug. 12. A draft merger was circulated on Aug. 13, followed by more drafts between the company's two lawyers.

The BMC and BFS boards both met on Aug. 26 and approved the deal. It was announced Aug. 27.

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