Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
And I'm Joe Weisenthal. Joe, we like talking about the old economy on this podcast, right? I don't even think when people use that term old economy, I think it's kind of unfair.
It's funny, I was literally about to respond and say that maybe like this whole old economy, new economy distinction is a little unfair. The old economy is still here. It's not, you know, it's still with us. It's not generative AI, but it's arguably maybe it's even more important. The things that we call the old economy, you know, you couldn't have the new economy without without cooling and heating.
This is exactly what I was going to say because like the old economy, the actual business of making things and moving things, heating and cooling is very much enmeshed with the new economy, which is all about generative AI. And in order to have generative AI, you need data centers, right? And if there's one thing we know about data centers, it's that they consume vast amounts of both building material and electricity. And yeah, heating and cooling. So, yes, you're absolutely right. We will no longer use the slur old economy. We will find some other word. But yes, we like talking about industries in which physical things get built and then sold at a higher profit at a higher price from which they were built from and how these things actually work.
Yes, indeed. So, we are going to be talking about that today. We also like occasionally talking about deals and it's not every day that we get to talk about a deal that has literally just been announced and is, I think, you know, one of the biggest deals that we've actually seen recently.
That's right. It's a deal talk. Let's do it.
Okay. So, we do in fact have the perfect guest. We're going to be speaking with Brad Jacobs. He's been on the show before and he is, of course, the CEO and founder of QXO, which has just announced a huge deal to buy a company called TopBuild in the insulation space. They're paying 17 billion and at the end of this acquisition, they expect to be the second largest publicly traded building products distributor in North America. So, truly a melding of mergers and again, the old / new economy. Brad, welcome back to Odd Lots. Thanks so much for coming on.
Oh, my pleasure. Great to be here.
Congrats on the deal. The first question I have to ask is, is it even accurate to call this an acquisition right now because if you're paying 17 billion for TopBuild, looking at QXO's market cap, you guys are at like 17 billion as well. This looks like a merger. This is so big, this basically looks like a merger.
Yeah, a merger. I'll go with merger. Merger's fine. Putting together two great companies and forming an even greater one.
You know what's funny? I hadn't heard of TopBuild up until, you know, this morning or sorry, yesterday when the news came out they were going to buy it. You know what I was just thinking about? Like America's incredible. Like this company, so it stock now with the premium that's baked in today trading at 484. This was a $43 stock as recently as 2018. America's incredible. Like these companies that sort of fly under most people's radars can just do you don't have to be in the Nvidias of the world to make a lot of money.
Well, I agree with that. You have to have a service or a product that there's demand for. And you've got to give a great customer experience. And if you have those two things, you'll make a lot of money.
All right. So, walk us through the rationale for doing this because again, like huge deal and it seems to have caught a few people off guard. They were expecting you to maybe buy, you know, some smaller companies, keep the roll-up strategy going. But again, this one is very large.
Oh, yeah. So, the acquisition of Beacon following the acquisition of Kodiak, which is followed now by the acquisition of TopBuild, takes us from 11 months ago where we had no building products revenue, let alone EBITDA, to the second largest publicly traded building products distributor in North America with more than 18 billion dollars in combined company revenue and more than 2 billion dollars of combined adjusted EBITDA. It's a big deal. It's a big deal in the industry. It's a big deal in the market as a whole. It's very creative to our earnings, meaning meaningfully creative to our earnings. And when you look at the multiples, that's reasonable multiples. We're paying 14.9 times 2025 EBITDA pre-synergies and about 11.8 times EBITDA post-synergies. And there's tons of synergies we can get. We're targeting 300 million dollars or so of synergies over the next 5 years.
Just to zoom out for a little bit, regular listeners, of course, know who Brad is. We've had him on the show several times. But just in case you don't, he is a serial entrepreneur. If there's ever a company and their ticker has XO in the handle, it almost certainly was founded by Brad.
Oh.
You didn't found that one. You didn't found Exxon.
I wish I had, but no, got away from me. But it's always these again, I hate words like real economy and old economy, but we could say physical economy. And it's like warehouses, trucking and freight brokerage and construction equipment rental and garbage stuff. Like anything real and physical, that's what Brad's into. He's founded numerous companies. He also wrote a book. Came out in 2024, How to Make a Few Billion Dollars.
And the reason I still have this job today is because I haven't gotten around to reading the book yet. Had I gotten around to reading the book yet, I'd probably be a billionaire by now and I would be doing something different. But I'll get around to doing that eventually. One thing that's interesting though to me just learning about TopBuild today in addition to seeing their stock, they had also been a serial acquirer. And in fact, it said like in one of their recent presentations, this has been one of their main strategies. So, why don't you like talk about like who is this company TopBuild? What do they do? Tell us a little bit about this the history and the footprint of this company that you're buying.
TopBuild is the largest installer and distributor of insulation. And as you were just saying, that everybody needs insulation. Every house needs insulation in the walls. Every office building needs insulation. Everywhere it's a needed product and it's not going anywhere. It's not going to be disrupted by AI or LLMs. It's just not going to go away. Yeah. So, when we complete the merger, we'll be number one in insulation. We'll be the second biggest in roofing. We'll be number one in waterproofing. And we'll hold number one or number two positions in certain geographies within lumber and building materials. So, we'll have a huge addressable market, several hundred million dollars.
So, I take the point that everyone needs insulation. This is definitely true. But we alluded to this in the intro, data centers in particular need insulation. How much of this deal is the expectation that you're going to be getting a lot of business from the data center build-out as well?
Oh, we will get a lot of business from data centers, but not just on the insulation. Data centers need roofs, too. Data centers need waterproofing. Very much so. Data centers often need lumber-related products. So, data centers are big consumers of building products. Now, TopBuild itself has single-digit percentage exposure to data centers, but it's very fast growing.
Wait, sorry. Say that how much exposure?
Single-digit percentage of the revenue.
But when it comes to growth, it's growing very very fast.
Okay. So, when we think about the insulation market in general, how much is it residential, how much is it commercial? And is there a lot of overlap or do companies tend to specialize in one or the other?
It's fairly evenly split. They have a little more residential than commercial, but they have both. And we have that as well, by the way, in our the company the two companies we bought before this, Beacon and Kodiak. We have residential customers. We have commercial customers. We have industrial customers. We have municipal customers. Everybody needs building products. If there's a building, it's made of building products.
And just to be clear on the nature of the business, they do installation. Like within the insulation supply chain, where do they sit exactly? Is it do they manufacture it or is it just distribution and installation? Like what do they do?
They don't manufacture. They buy it. And then they either resell it at a higher price to a contractor or they actually install it. They sell it and install it to various customers.
Okay. Well, now I have a dumb question, but is there a quality differential when it comes to insulation? Like is there a particular type of insulation that a data center would need versus your run-of-the-mill house?
There's not too many different types of insulation, but there are different types. And the big manufacturers are ones like Owens Corning or Johns Manville or Knauf is another big one. So, you know, big companies and very high-quality stuff. So, insulation has been around for a long time, but technology makes it better and better every decade.
Where's it made, insulation?
It's mostly made in the United States.
Is it? Yeah. This seems to be I was surprised. I remember the last time we talked to you about like roofing and you mentioned how much shingles still made in the US. Talk to us about like why is that? Why is this a particular type of good that is still largely what are the economics of it such that it still makes sense to manufacture it in the United States.
It's more about regulations. So, the types of building products, the regulations, the codes are different country to country. So, insulation in Europe is not quite the same as insulation here. Roofing products in Europe not quite the same as it is over here. So, waterproofing, same thing. So, slightly different regs, and that makes it better to manufacture closer to where it's being used.
So, how did TopBuild actually get on your radar? Did you initially approach them? Did they approach you?
Absolutely, we approached them first, yeah.
Okay, so now I'm very curious because I know you have a lot of experience in M&A, and you know, a lot of people would describe your business as basically a roll-up for building materials, but I also know from reading your book and by the way, Joe, I'm not yet a billionaire, but I did read the book. You have a very specialized process when you target a company to acquire them, including having a former CIA intelligence officer, one of the guys who I think like worked with lie detect and all that. He was on your podcast. Yeah, yeah. Yes, yes. So, did he interview all the CEOs and they all went through background checks and that sort of thing?
So, we do background checks, but we spent 2 days in our lawyers' offices here in New York and about 15 members of the senior management team of TopBuild came up, including the CEO and CFO. And yeah, we interviewed each one for like an hour and a half and got to know them and checked out. Everything they said was true.
I love that. Interview two guys for an hour and a half and say, 'Here's $17 billion.' Sounds good. No, there's a I'm sure it's a little more complicated than that. What else goes in in the due diligence process? Do you go around and talk to customers?
Oh, yeah. So, talk to us about that. Well, we have a lot of the same customers. We have a lot of same vendors. Big overlap. So, TopBuild is very well-known company. It's the number one company in its field, so it's pretty easy to check them out. So, we knew what we were getting before we did those interviews over 2 days, but still you want to talk to the people. You want to find out where are the skeletons and what are the risks and what are the good things and where's the opportunities and where's the upside and what are some things you can bring to the table, particularly in terms of technology that could turbocharge the growth of the company. So, those in-person meetings are very important. It's not the only part of due diligence. Sure. You do a lot of stuff online. You do a lot of stuff with third-party channel checks, but those in-person meetings with the management team are absolutely crucial. I would never buy a company, any company, without doing management interviews. It's the most important part of due diligence.
It's funny. I was hanging out with some people over the weekend, and I was hearing about some deals that they were doing in the AI space, including a pretty large deal that apparently they completed in an afternoon. And you can imagine what the due diligence process is on a deal that's completed in a single afternoon.
I don't know how to do that yet. That's over my capabilities, but it doesn't take a long time. We're surgical and not overly intrusive in the due diligence, but afternoon is a little tight.
So, what made you comfortable with the premium? Because again, 23% on the existing share price of TopBuild, that's a pretty nice amount of money.
It's a fair price. It's not a terribly high price. It's not terribly low price. When you look at multiples of EBITDA it's 14.9 times 2025 EBITDA pre-synergies and about 11.8 times EBITDA post-synergies, the expected synergies. So, you know, it's reasonably priced. It's a lower multiple than we trade at, which is very important because that's where you get the accretion. The accretion to earnings per share. This is going to be a massively accretive transaction for us.
Talk to us about setting aside this acquisition, which we'll come back to. How does business feel over the last year? You know, just generally economic conditions in the building materials distribution world? What's been the last year like?
Super soft. Super super soft. Now, super soft because demand in general in building and construction is soft, is weak, and we're not immune to that. But we've mostly been in roofing up until recently.
Now, roofing is a special animal because it's extremely affected by weather. Meaning bad weather. You want to have bad weather is good weather for roofing. So, you want to have sleet and a lot of hailstorms and hurricanes and tornadoes. And I got to tell you, there's a lot of cognitive dissonance about that because for all my life I've watched television, you see a hurricane like normal people, unless you're a sociopath you feel bad. You feel oh wow, it's too bad that these people are getting their roofs blown off.
Wait, have you become a sociopath?
No, no, no, no. Definitely not becoming a sociopath.
