Masco to Sell Off Insulation Installation Business

Originally published by: Wall Street JournalSeptember 30, 2014

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Masco Corp.,moving to streamline its building-products empire, unveiled plans on Tuesday to spin off a division that installs insulation and other third-party products in newly built homes, throwing in the towel on a two-decade effort to develop that business.

The company, which owns such well-known brands as Delta faucets and Behr paint, said it intends to spin off the installation division, which employs 7,400 people, by next year. The unit brought in $1.4 billion of revenue last year. In this year's first half, Masco's revenue totaled $4.2 billion.

Keith Allman, a Masco insider who became chief executive in January, said the spinoff will make Masco a less cyclical business, increase its profit margins and focus it more on the home-repair and remodeling market, though it will continue to sell its products to home builders.

Along with the spinoff, Mr. Allman said Masco plans to buy back 50 million of its shares, or about 14% of the total outstanding, and shed more than 40% of its headquarters staff.

Mr. Allman is looking to simplify Masco's portfolio of dozens of home-improvement and construction products. In recent years, the company, which is based in Taylor, Mich., has lagged behind its peers in stock-market performance. It struggled to cut costs quickly during the housing downturn and has failed to fully turn around its installation and cabinetry businesses.

The planned spinoff ends Masco's nearly 20-year effort to establish itself as a leading installer of such third-party products as insulation, fireplaces, gutters and garage doors. The business never quite meshed culturally or operationally with Masco's other divisions, which all are product-manufacturing units, rather than service providers. Masco also found its profit margins in the installation business squeezed by countless smaller, independent contractors willing to work more cheaply.

The newly independent installation company will be led by Masco veteran Jerry Volas as CEO. Masco has yet to determined how much of the new company's stock shareholders will receive for each Masco share.

After the spinoff, "Masco will pursue a more focused strategy of growth through the innovation and manufacturing of branded building products globally," Mr. Allman said in an email Tuesday.

The installation unit's business is far more cyclical than Masco's other operations, and has been a drag on the parent company's performance as the housing sector's rebound has remained sluggish. U.S. home construction this year is running at roughly 60% of its average annual output since 2000.

"The installation business really only thrives at certain points," said Stephen East, an analyst who tracks home builders and building-products companies for ISI Group Inc. "Those [times] are when builders just need to finish homes and are less price-sensitive. Masco offered one-stop service" that was well-suited for those circumstances, but not for a slower construction market.

Masco plans to keep another struggling business. Its cabinetry division, which owns the KraftMaid and Merillat brands, has faced growing competition and has had trouble making inroads with independent dealers. In the second quarter, the division's sales fell 5% from a year earlier to $253 million, and it posted an $8 million operating loss.

"Cabinetry fits well in our portfolio of branded building products at this time," Mr. Allman said. "And we are committed to fixing this business and have every confidence that we can turn it around."

Investors have expected Masco to make a divestiture since Mr. Allman said in May that he was starting a strategic review of the company's business lines. Since the downturn, Masco has come under criticism for becoming so large, with so many product lines, that its management appeared to have difficulty keeping track of its various divisions.

Mr. Allman said in June that he had undertaken his review of Masco's operations as a "transformational leader," rather than a status-quo executive. The company hired investment bank Greenhill GHL -0.60% & Co. to advise it during the review. Adding to the pressure for change was a disclosure that activist investor Daniel S. Loeb's Third Point LLC amassed a 1.3% stake in the company in the first quarter.

Mr. Allman has since met with Third Point and exchanged ideas, though he declined to describe the discussions publicly. A person familiar with Third Point's strategy said Tuesday that the firm was "pleased" with Masco's changes.

Masco's stock generally has rebounded since talk of Mr. Allman's strategic review began in May, when it was around $20. It reached a closing high of $24.44 on Sept. 17 but has retreated a bit sense. In early afternoon trading Wednesday, the shares were at $24.07, up 75 cents, or 3.2%.