Ladies and gentlemen, welcome to the Saint-Gobain Conference Call. I now hand over to Mr. Pierre-André de Chalendar, Chairman and CEO, Mr. Benoît Bazin , CEO, and Mr. Sreedhar, CFO. Gentlemen, please go ahead.
Good morning. Pierre-André de Chalendar speaking. Good morning, everybody, and thank you for joining our conference call today. As you will have seen in our press release last night, we have signed an agreement to acquire Continental Building Products, a highly respected platform player in North America. This transaction has been unanimously approved by the board of directors of both Saint-Gobain and Continental Building Products for an enterprise value of $1.4 billion, approximately EUR 1.3 billion. Now, we are going to comment on the slides that have been posted on the internet, so I'll start with slide two to take a minute to explain how this acquisition fits with our Consumer and Growth Transformation Program and give you a brief update on this program.
As you know, the aim of this transformation program is to enhance the growth and profitability profile of the group, and I'm pleased to say that we are on track. This program rests on two pillars. The first pillar is a new organization for the group, which is already allowing us to be more customer-oriented, leaner, and more agile. The benefits are already visible this year. For the construction part of the business, it means being local to match our customers' needs as we are serving local markets. I want to be at the forefront of each of the markets where we operate. The second pillar is our active and value-creating portfolio management strategy. We have now signed or closed divestments representing around EUR 3.3 billion in sales for over EUR 1 billion in cash proceeds. What is more, we have sold these businesses at good multiples.
If I combine them all together, it represents 10 times EBITDA and 15 times operating income on a 12-month basis before the consolidation. When Sreedhar takes you through the financial details of this transaction, you will see that we are acquiring Continental Building Products at a lower multiple than the businesses we have sold, including the cost synergies we expect to achieve. On the acquisition side, we continue to focus on three areas: niche technologies, adjacent to ours, emerging countries, and to further improve our local presence and profitability, which is where the acquisition of Continental Building Products clearly fits, as we look to move to the forefront in plasterboard and construction solutions in North America. Now, I hand over to Benoit, who is going to explain to you the rationale for the acquisition of Continental Building Products.
Thank you, Pierre-André, and good morning, everyone. I now move to slide number four. As you know, gypsum is a core business for Saint-Gobain around the world. We have actually delivered significant organic growth over the last years in the 5% range every year. Given the local nature of construction markets, our local presence is important. We have strong, well-established local businesses for gypsum in most countries across Europe and in Asia, in Latin America as well, where we have made two acquisitions in Latin America this year, Mexico and Argentina. We are also well represented in Canada, but in the U.S., we have until now been underrepresented in the gypsum business. Moving to slide five to highlight all the customer-centric innovation of gypsum. Indeed, thanks to our focus on research and development, we bring innovation to our customers.
We have teams working on transversal projects with relevance across the whole of Saint-Gobain. They bring new solutions to our plasterboard business in line with our long-term growth drivers of sustainability, comfort, and productivity in the construction sector. In terms of comfort, our deep-wall quiet system, for instance, improves acoustic insulation inside a family home. Active air improves air quality. In terms of sustainability, plasterboard plays a key role in lightweight systems that are excellent for low-carbon construction. We have already plants in 18 countries around the world that recycle gypsum waste into manufacturing of plasterboard. On the third topic, productivity for our customers, we see growing plasterboard applications in off-site manufacturing, for example, prefab or smart fitting, for instance, to accelerate renovation work at many job sites.
Some very innovative products like our Habito plasterboard bring not only new features to the end customers, such as high-impact resistance, but also productivity to professionals as it allows them to hang kitchen wall units or large TV screens directly onto the plasterboard. I move to slide six with a zoom on North America. Saint-Gobain is at the forefront of construction solutions in North America, where we have a large presence with roughly 7,000 employees and $4 billion of sales, with gypsum, ceilings and insulation for interior finishing, roofing and siding for exterior products, and also some specialty products such as textile solutions or dynamic and specialty glass, which are leveraging all the innovation from our industrial businesses in high-performance solutions. I take just gypsum in North America. We are just shy of $1 billion, 2/3 in the U.S., 1/3 in Canada.
As a result, you can see that we are able to provide comprehensive construction solutions to our North American customers with a unique portfolio for both residential and commercial buildings. On slide seven now, let's zoom on gypsum in the U.S., where, as I said, we are currently underrepresented. The U.S. is an important country and actually the largest market in the world for plasterboard, wallboard applications. We are very confident that the future growth of the U.S. market, driven by solid demand fundamentals, residential represents around 70% of the gypsum market in the U.S. and should benefit from ongoing population growth and also a continued recovery in housing stocks, which remain well below historical average. We still see around 20% of site growth potential going forward, this has actually been confirmed by recent positive statistics on housing stocks in the U.S.
The remaining 30% of demand comes from the commercial sector, which should benefit from flexible economics as well as the robust population growth. Turning now on slide eight to Continental Building Products in more detail. The business is the best-in-class player in U.S. gypsum. You can read their key figures. The financial numbers speak for themselves. On top of these, there are several key points I want to highlight. First, Continental Building Products have well-established plants strategically located in the eastern and southeastern U.S. states, close to large customer areas. Second, they have strategic raw material supply in terms of both gypsum and paper, flexible and well-secured. Third, and even more importantly, Continental Building Products has a highly experienced management team with an impressive track record, and we have high respect for what they have accomplished over the years.
Our recent interaction with them around this transaction has been extremely positive and professional. Moving now to slide nine, I would like to talk to you about how well Continental Building Products and Saint-Gobain in North America fit together. The two businesses are very similar in terms of their operating model and culture of industrial excellence. There is a strong cultural fit between our two businesses. For instance, the Continental Bison Way Operational Excellence Program rests on the same pillars as our world-class manufacturing program. We are also highly complementary in terms of our geographic positioning. All this will allow us to deliver best-in-class logistics and customer care for better customer service and optimized costs, and also to enhance our reach into growing regions in the U.S.
The combination will allow customers to benefit from an enriched product portfolio thanks to the launch of new and innovative solutions supported by Saint-Gobain's global R&D efforts. We'll also bring to Continental Building Products an international benchmark and best practices of Saint-Gobain across all our plasterboard locations around the world. To put it simply, our enhanced asset portfolio and the combined excellent operational skill set will allow us to better serve all our customers. Sreedhar will describe in a minute our synergy, but we feel very confident about the synergies that we deliver on the combined entities. We are extremely happy to welcome the Continental teams to Saint-Gobain. We know we will learn a lot from each other and will make it together a fantastic business.
I now hand over to Sreedhar who will give you more details on the financials of the combination, the synergies, and of course, details on the transaction.
Thank you, Benoît , and good morning, everyone. You can see on slide 10 how the strengths of Continental Building Products that Benoit described have allowed the company to drive growth with compelling financial results. This strong growth in sales with an average of 5.6% between 2013 and 2018, together with increased EBITDA margins, has led to a significant improvement in return on capital employed to 16% in 2018 and cash generation almost tripling over the same period. Moving to slide 11, this acquisition will further improve our presence and profitability in North America. This will also enable us to compete better in the gypsum business. You can see here how the combined business would look with pro forma sales of $4.5 billion in North America and an enhanced EBITDA margin of 16%, including cost synergies.
A good improvement of 200 basis points in the EBITDA margin of our North American regional business. Turning to slide 12, let me now give you some more details on the synergies. The cost synergies that we have set out cover three areas: logistics, operations, and SG&A. In terms of logistics, the combined business will allow us to be able to optimize freight and improve the supply chain. We will also rationalize our logistics network. In terms of operations, we expect to achieve economies of scale in purchasing and to optimize our combined production to achieve longer runs and economies of scale in our factories for the benefits of our customers. Finally, in terms of these cost synergies, in SG&A, we will optimize our combined support functions, including the elimination of public company cost of Continental Building Products.
You can see on the left how we expect these cost synergies to come through year by year with a full run rate expected in year three of approximately $15 million. In addition to these cost synergies, we expect to benefit from additional sales thanks to an enlarged commercial platform for our product offering and increased commercial reach for our specialty glass and ceiling solutions, for example. In addition, the enhanced scale will allow us to be able to better take advantage of the group's capacity in transversal innovation to benefit our North American customers. These synergies are, in addition to $50 million of cost synergies identified. In summary, it is a very prudent assumption, and we are very confident to achieve it.
Now, turning to the details of transaction on slide number 13, the offer price is $37 per share, and the acquisition is based on an enterprise value of $1.4 billion, approximately EUR 1.3 billion, representing an EBITDA multiple of around 11 times based on 2019 consensus and 7.9 times, including run rate synergies of $15 million. The acquisition will be value creative by year three in line with our acquisition criteria, and this is defined as return on capital employed being above the weighted average cost of capital. The acquisition will be made fully in cash, largely using proceeds from the divestments. As stated before, we continue to target to preserve the stability in our credit ratings. The closing is subject to Continental Building Products' shareholders' approval, U.S. antitrust approval, and fulfillment of other customary conditions, with expected closing in the second half of 2020.
I will now hand over to Pierre-André to conclude.
Thank you, Sreedhar, and thank you, Benoît . To conclude, this acquisition is an exciting and decisive step for Saint-Gobain in North America. Combined with Continental Building Products, we'll be better able to serve our customers and better able to compete in this region, which has an attractive growth potential in light construction. Finally, as Sreedhar said, this acquisition will be value creative for our shareholders by year three, meeting our strict financial criteria. We are very pleased, and this acquisition demonstrates, with all the other portfolio movements of the last 12 months, the strong dynamic at work to transform Saint-Gobain and significantly enhance our growth and profitability profile. Now, Benoît , Sreedhar, and I, we are happy to answer any questions you may have.
Ladies and gentlemen, if you wish to ask a question, please press zero and one on your telephone keypad. The first question comes from Jean-Christophe Lefèvre-Moulenq from CIC Market Solutions. Please go ahead.
Messieurs, bonjour. Congratulations. I have two questions. First, 15-time EBIT multiple is in line with what Knauf paid for USG, but it is more than the multiple you paid for BPB. It was, I think, 13 times, so maybe a bit expensive. Second issue with the combination with Lafarge, Plateau Lafarge U.S. and Continental, you will reach roughly 21% market share. Will you be able to enhance your pricing power? I think we had some difficult issues in U.S . wallboard pricing over the two last years. Can you give us more color, please? Many thanks.
I'll take these questions. BPB, if you look at, based on my memory, because I was involved in the acquisition and integration of this project, after the synergy, it was around nine times of EBITDA.
Nine times EBITDA, yes. Roughly 12 times EBIT, probably.
If I have to compare with what you're doing now, it's actually lower because we're talking of 7.9 times the synergy after synergy. As compared to BPB, this price is certainly lower. Coming to the pricing, I won't make any additional comments. We have spoken at length in the Q3 call, and we will talk about the pricing in February. I would not like to make any comments on pricing during this call.
Coming back to the first question also, Jean-Christophe, what is interesting is that when we bought BPB, we had growth synergies with our insulation business. Here, we feel very confident because it's all about cost synergies. The ability to deliver that, again, is different, and we'll do that on the short term, and it's a very cautious and very proven ability to deliver on those cost synergies.
We expect to have growth synergies, but we have not.
Prudence.
Factored them in this calculation. Again, by prudence, we have not factored the growth synergies.
Okay. Okay. Thank you so much.
Thank you. Next question from Elodie Rall from JPMorgan. Please go ahead.
Hi, good morning. It's Elodie Ralph from JPMorgan. Just a couple of questions, if I may. First of all, on antitrust concerns, do you think any potential concerns on the overlap of the business in the northeastern region in particular? Second, on the timing of the closing, I mean, why having to wait the whole year out of H2 to 2020? That seems like a long time. Can you give us a bit more color about that?
Benoit.
Lastly, if I can ask a last one, what was the rationale of the transaction versus buying your own shares? I mean, have you considered that, and was that something?
Benoit, the first one, as I said, we are underrepresented in the U.S. market in terms of overall position. We are confident that the antitrust authorities will consider this transaction to be pro-competitive in all regions. That's the first point on your question. Regarding the timing, it will take at least three to four months to get to the vote of the shareholders. We'll have the merger agreement filed at the SEC in the coming days, and then in a few weeks, four to six weeks from now, the background of the merger that will be filed as a proxy, and then the vote of the shareholders in three to four months. After that, we have the antitrust filing. We expect a close in the second half of 2020.
This is consistent with prior transactions in the U.S., whether it is the vote for shareholders and after that, the antitrust filing. We'll expedite that, but it is the regular timing on such a transaction.
Concerning your question on share buyback, as you know, we have bought 8.5 million shares this year, and we continue to consider share buyback on an opportunistic basis. When I look at this transaction, from a strategic standpoint, on a long-term basis, it seems clear to us that it has merits which will go beyond the buyback. That is why we are pursuing this acquisition. Clearly, we will continue to make buybacks on an opportunistic basis when it makes sense for us.
Okay. Thank you.
Thank you. Next question from Yvonne Hed from Exane BNP Paribas . Please go ahead.
Good morning, gentlemen. Three questions, if I may. On the first one, I'd be really interested to understand your strategy regarding the sourcing of raw materials, given that Continental is highly dependent on synthetic gypsum versus natural gypsum. Will you actually focus on increasing the share of natural gypsum through potentially some exports from your French and Spanish reserves? Do you need to add any CapEx to fit probably the Kentucky plants for that, for example? Two, could you confirm that the agreement that you have entered with Continental removes the risk of potential outbidders? Lastly, does this actually rule out any further consolidation, as Eagle Materials seems to also be potentially on the table? Thank you so much.
Sure. The question on sourcing raw material is obviously an important one that we have looked in detail. Benoit will answer that question.
Yeah. Thank you for your question. I would say, if I look at our actual network of plants, I would say west of the Mississippi, it's mostly natural gypsum, and it's also in Canada. We have quarries west of Mississippi in several places. East of the Mississippi, as you stated, it's more of a DLG market. The very interesting point on Continental Building Products is that they have two plants, New York and Florida, which are at the river, at the oceanfront, and they have invested a lot in terms of being able to unload large vessels. They are well equipped already in terms of being able to not only unload natural gypsum, of course, continue to use synthetic gypsum when it's there, and being able also to run their plants with a combination of both.
Strategically, we think they are the most advanced in terms of combining the two. As you stated, we export a lot of our Spanish rock, and that's something which we'll continue to do going forward. Clearly, the plants in New York and Florida will benefit from that. They are also able to use synthetic gypsum in Kentucky and also to move up from the Mississippi River up to the Kentucky plants some natural gypsum. Strategically, I think this is the best player in terms of having secured very strategic rationale on both natural and synthetic gypsum going forward, not only in terms of sourcing, but also in terms of equipment in the plant. There is no need for significant CapEx to run both. They already do that. It's very interesting from that standpoint.
In terms of your second question, we don't comment on potential Nika Looper. We have all the ordinary and customary provisions for that in the merger agreement, which will be filed in the coming days. We feel very confident about the very attractive price that we have offered and full and fair price to the shareholders of Continental Building Products. As you have read, the offer has been unanimously approved by the board.
Considering further acquisition in this business, I will not comment on this either. I think this is an important move for us, and we are going to concentrate on the execution of this deal, and I don't have further comments to make at this stage.
Thank you so much.
Thank you. Next question from Sven Edelfelt from Oddo BHF Securities. Please go ahead.
Yes. Good morning. Sven Edelfelt of Oddo BHF. A couple of questions from my side. Can you tell us if this acquisition went through the new decentralized organization? What I'd like to understand there is if this acquisition was done the old-fashioned way or is it done differently, meaning through the country CEO, as you explained, on the back of the new organization? Second question, what are your hypotheses to get to a three-year value creation, and did you include a potential end-of-cycle scenario? I might have missed it, but just to follow up on Yves' question, is there any breakup fees for the deal?
Okay. I'll take the first question, and Sreedhar will take the second one. For a deal significant like this one, which is a little more than just a small bolt-on, it's obviously an exercise where the corporate has been involved and the board has been involved. On the other hand, it is also clear from a North American perspective that the new organization has been looking, like Benoit said in his presentation, to its activity in gypsum. It was clear, both from a local level and from, I would say, a corporate level, that we were underrepresented in gypsum in the U.S. I think that your question in this particular topic is not exactly relevant. It's, of course, a combination of both.
Maybe just to add to that, it's all, of course, teamwork like we always do within Saint-Gobain. I was in the U.S. on Monday with our Head of North America, with the Continental people finalizing all the details, and we'll be there on Thursday and Friday to send positive messages to all the teams of Continental Building Products. I would say that the reaction from our teams and their teams yesterday night, because it has been announced yesterday night in the U.S., has been extremely positive.
We are very confident.
We're confident, but the cultural fit and integration.
Sreedhar on the value creation?
Yeah. We have taken a very cautious hypothesis, and as we said, Sven, that the synergies we have considered for year three is very poor, and we have not factored the synergies related to sales. We are confident of creating the value in year three. Your last question on.
Do you like this question regarding breakup fee? Again, all the details of the merger agreement, which I cannot comment on today, will be filed in a matter of a few days at the SEC, and you will see all the details. We have, as I said, all the ordinary provisions in that regard.
Okay. Thank you very much.
Thank you. Next question from Michael Betz from Database Analysis.
Thank you. I had two questions, please. The first one is on EBITDA margins. You talked about the U.S. operation of Saint-Gobain, not the gypsum activities of Saint-Gobain. My first question is, are the EBITDA margins of the North American gypsum business, the heritage business, similar to those of Continental? Could you talk a little bit about closing that margin gap with Eagle? Obviously, synergies will be part of it, but is there further potential, or is the remainder structural? My second question, please, is in terms of customer overlap. Could you talk about that in terms of maybe I do not know if you have any percentages of how similar the customer base is, how it opens up new potential customers, etc.? Thank you.
Benoit, we'll take your two questions like.
Continental Building Products is the best-in-class company in terms of margin. If I look at our business, we are strong in Canada, so we have a good profitability in Canada. The east of the Mississippi market for us is better in terms of profitability, although, again, Continental Building Products is best in class. We are below that on the west of Mississippi. On average, in the U.S., we are for sure below Continental Building Products, being a bit further on the west versus the east part of Mississippi. The synergies will help us to improve all that, again, from a cost standpoint, from also a lot of best practice sharing within the operations. Freight will save a lot on freight, just to give you the magnitude. That is why also we have been very reasonable.
We intend to save roughly 7% of our combined threat cost east of the Mississippi. I think it's very reasonable. Eagle, again, if we talk about another listed player, is also best in class. For sure, we'll continue to boost our operations to improve the profitability. Your second question on customer overlap, I cannot comment on that. What is true is that from what we have seen in the early discussions we had with Continental Building Products, they have an attractive presence in retail, for instance. Historically, certain fields, whether it's on gypsum or roofing, siding, has been very low on retail. That's definitely something where we can grow together. After that, the market varies region by region. We don't think there is any disynergy, if this is your question, on customers.
We think, on the opposite, that we can provide to our customers and to the Continental Building Products' existing customers the full breadth of certainty for the clients, whether it's in ceilings, whether it's in roofing, siding. We think it will open up. We didn't factor that in the synergies, but a lot of growth synergies for the existing customer base of Continental Building Products.
Thank you. Can I just clarify how you're defining best in class? Because there is quite a margin gap between Continental and Eagle. Presumably, your best in class is products or business model. How are you defining Continental as best in class?
In terms of EBITDA margin, yes, there are still some points of margin gap between the two. Again, the markets are different. West of Mississippi is quite a different market than the east, which is extremely competitive in terms of number of players. I think that explains quite a bit of that. Second, in terms of product line, some of the players west of Mississippi are just running commodity products. I think on the east part of the country, the market is a bit more sophisticated with more added value products. That is differentiation also between the two players.
Understood. Thank you very much.
If you think of the other player, which was listed, USG, which now is not anymore listed, but clearly, the two Continental and Eagle were well above USG in terms of overall margin. That's why I call them best in class, I would say.
Understood. Thank you very much.
Thank you. Next question from Arnold Leung from Bank of America. Please go ahead.
Thank you. Good morning, Leung . I have three questions, if I may. Firstly, can you give us an indication of Continental market share and what's your existing market share in the US Gypsum market? Or if you don't want to give numbers, at least give us a feel for you're going to move from, let's say, top five in the U.S. Gypsum market, maybe to top three or something like that. Secondly, on your view of the U.S. housing cycle, I appreciate we're not really at inflated levels in terms of housing starts and permits. On the other hand, we've been about eight years into some sort of housing recovery, albeit a slow one. I am assuming you're still expecting several years of a decent housing environment in the US.
Lastly, in terms of your capital allocation, should we assume that if you make further disposals in the coming months and years of, let's say, non-core businesses, is today's deal a good illustration of what you might do with the cash? You're going to continue to make acquisitions in the building product space? Thank you.
On the third question, I think on acquisitions and on buybacks, as I said, we are opportunistic. We have very strict criteria. Our three priorities for acquisition, it depends on the opportunities. We are looking at many companies, small ones, in the framework of a new organization. I don't think you can speculate on the results of these analyses, which depend on what's available or not and whether it meets our criteria. That's why we are pragmatic on this, and I don't want to start from a defined view. On the market share.
Again, we don't comment on market share. I would say from public information in the association, both CertainTeed Gypsum and Continental Building Products were in the 10 to 11% market share nationwide. Again, as I stated, we are confident that this transaction is pro-competitive in all regions.
Concerning the housing start, I think Benoit mentioned that also during the presentation. We are still around 20% below the long-term average. You talk about a recovery, but it's a recovery from very, very low points. Yes, we assume, given the demographic in the U.S., we assume that there is no reason to believe that the long-term average is going to be significantly what it has been. Yes, we assume that today we are below average in terms of housing starts in the U.S. There is an upside, as Benoit said during the presentation.
Thank you very much.
Thank you. Next question from Justin Touareg from Onfield Investment Research.
Yes. Good morning, Dr. Hleman. A couple of questions for me. First, when we look at the latest number published by BPB, it was a very long time ago, but before the crisis, I think they had the margin disclosed by BPB in North America was approximately 200 to 300 basis points below the margin published by Continental Building Products. Is this gap of 200 to 300 basis points still there today? Is it the order of magnitude that we should look at when we look at the difference between Saint-Gobain and Plasterboard in the US versus Continental Building Products? My second question would be on potential disposals. Do you think that the Antitrust Authority could ask you to sell some assets?
I think there is an overlap in the eastern, south-central, and in South Atlantic, and in some states, the combined market share could be quite high. Have you anticipated any potential disposals related to this deal?
Honestly, to answer the first question, I think it's not relevant to look at what was the profitability 15 years ago. Continental didn't exist per se. Some of the plants of Continental have been built more recently. It's a completely different company from what it was 10 years ago. I think it's a very different company from the company it was 6 years ago. I think that, honestly, I don't think trying to look at what was the profitability of the various companies 15 years ago is of any help to assess the situation. Concerning the Antitrust, Benoît already answered, but maybe you want to.
Again, the point of that is that we move from a market with seven players to six. Second, we are confident, as I said, that the Antitrust Authorities will consider the transaction to be very pro-competitive in all regions.
Yeah. Just to add on the margin, I think my comments were about BPB margin, where before the crisis, the BPB margin were approximately at 23% in North America. Are your margins, so the margin of Saint-Gobain, close to what they were before the crisis in North America, this 23% BPB margin?
No, I think they are below. They are below, and we cannot compare the housing start situation that we face today, where we still see some upside, with the situation that we had in 2005 and 2006, where it was totally exceptional and frankly abnormal.
Above 2 million, yeah.
Thank you.
Thank you. Next question from Tobias Woerner from MainFirst. Go ahead.
Yes. Good morning, gentlemen. Three questions, if I may. Number one, just what your average cost of debt is assumed in this deal. Number two, what your hurdle rate you're applying here. Number three, you seem to have a market share post this transaction, and I don't expect you to come with exact numbers, but of around 23%, which makes you the number two player in North America. Is this a fair assumption from somewhere around 10% before?
The cost of debt you would have seen in our first-half results, we talked about 2.2%. The weighted average cost of capital for us is 6.85% for this region.
On the question, I think Benoit already answered the question, between two, we should become number two or number three.
I mentioned the public information on national market share as of today, where both companies are in the 10-11% range.
Okay. Thank you. I came onto the call a little bit later, so apologies for that.
Okay. No worries.
As I'm on the call now, can I also ask whether you talked about the benefits of the integration into the Celotex business, similar to what you're doing in Europe, i.e., your insulation business, what the benefits could be there?
Clearly, we see some benefits for the customers in the U.S. As you know, if I take a further example, as part of Transform & Grow, we have put together our salespeople for roofing and siding, which did allow us to open a lot of our distributors, which were selling roofing, particularly west of the country, where we were almost not present in siding. This year, we have a big growth on siding because we have been able to open up some exterior product distributors to siding, where specifically roofing to siding. We see those kinds of benefits. It's not necessarily only with insulation, which is quite vertical in the U.S. It's a lot with ceilings also. Gypsum and ceilings go together quite often, so it's interesting.
You may have seen that we did some small specialty ceilings acquisitions, two of them in North America over the last 12 months. Yes, there will be benefits to customers in terms of broader product offering, not only with insulation, but also some larger product lines. Some of the large distributors, if I take some of them, the two top distributors of roofing, over the last years, they did buy some interior finishing products distribution, ABC, both L and W, Bicon, Roofing, both Allied. Those distributors were more on the interior finishing combined with exterior products. It makes a very attractive and dynamic and very competitive market in the U.S. across all product lines.
Thank you very much for that.
Thank you. Next question from Tobias Weimann from Morgan Stanley. Go ahead.
Good morning. Thank you for taking my questions. I have three, if I may. Firstly, on the cost synergies, so $50 million, it's almost 15% of the Continental Building Products cost. Clearly, it's coming sort of from both companies. Can you give us a little bit more details on the split? How much of this is coming from logistics versus scale economies versus SG&A savings? A second one also on the sales synergies. Those are not factored in the $50 million, but can you give us maybe a rough idea how significant you think the revenue synergies could be and how long it will take until we see them? The final one, just on capital allocation.
I was personally, I would say, quite pleased to see you're reducing your leverage this year with the disposal proceeds, but now it's going up again, I think, 0.2 or 0.3 turns after this transaction. Can you give us a bit of a medium-term outlook where you would like to see your net debt dividend? Thank you.
Yes. Sreedhar, will you take all these questions?
Okay. On cost synergy, if you look at, we have these three broad areas where we're looking at. It's logistics, operations, and SG&A. Approximately, it's 1/3 of each. Each of them contributes to almost 1/3. If you look at the freight and logistics cost, it's a very important cost in the gypsum business. We just have to keep that in mind because it's an extremely important cost. If you just take the region where we are looking at the synergies, which is primarily eastern North American coast, and if you look at that, we are talking about even not 7%. It's a very, very prudent assumption we have taken on freight and logistics costs. Coming to operations, what we're looking at is clearly the synergies related to purchasing because we will have the economics of scale.
We are also looking at optimizing the combined production to see how we can have longer runs and, again, optimize the economy of scale. When you look at the overall operational cost, it's not even 2%. It's, again, a very, very prudent assumption here. SG&A, what we are looking at here is optimizing these functions. Don't forget that, again, it's a listed company, so you have the cost related to a public company cost, and it's not even 20% of the cost base. When I look at this $50 million synergy, once again, it is very prudent, and getting it in three years' time is something which is achievable. Coming to your sales synergies, the fact that we have not put a number because we want to, we have a lot of ideas. We believe that this is something which is feasible.
We don't want to put a specific number to it, again, by prudence, because it all depends on the time and how much time it would take. What we are also talking about is there are a lot of innovative products which we are selling in the European market, which are quite popular. The fact that we will have an increased presence in the North American market would help us to provide this additional value to the customers. All this is, again, we'll have to go through the process of convincing the customers, showing them the value. Certainly, there is an upside in sales synergies. We have not put a number to it.
Just one additional point on the soft side, I would say, on synergy, which is always extremely important, as we know, is the human aspect. We have a high respect for the teams of Continental Building Products, and we are very happy to welcome them. I'm absolutely confident that the cultural feed between the two teams and the interaction we had in the recent past around this transaction has been extremely positive about ideas, about momentum. I feel very comfortable that our teams will work together for the best of the two combined entities. This soft aspect, when you put two companies together, is always extremely important, and we feel on both sides very good about that.
Yeah. Capital allocation?
Yeah. It's a leverage. His question was leverage.
Leverage.
As I said, our credit rating is something which is very, we target to secure this credit rating, and the credit rating is a good credit rating. If you recall, it's CCC and Baa2. This is something which we believe we will be able to secure this given the situation we have today on the debt. Okay?
Okay. No specific level of leverage in mind?
You know by the way, when you look at the leverage, the two rating agencies, each of them has their own definition on leverage, which is not exactly the one on EBITDA versus debt. And we feel comfortable in the range where we are today in terms of credit rating.
Do not forget, we have close to more than EUR 1 billion cash we have from the divestments.
Thank you.
Thank you. We don't have any more questions for the moment. Ladies and gentlemen, if you wish to ask a question, please press zero and one on your telephone keypad. We have a new question from Pujal Joseph from Kepler. Please go ahead.
Yes. Hello. In fact, I have two questions, please. The first one is about how do you envisage the integration? Who will lead this new entity of gypsum and plasterboard in the United States? Will it be the Continental Management Team or the Saint-Gobain Management Team? My second question is, I would say, a curiosity. Have you envisaged this transaction previously? Why doing it now? This success story has been there for a while. Why now?
The first question.
Yeah. I take the first question. It's too early to say, and we'll start integration workstreams as of tomorrow morning. I will be with our head of North America touring the plants, of course, in all legal compliance. There are things we cannot do until closed, but we'll tour the plants with the CEO, Jay Bachman of Continental Building Products, the sales director, and the manufacturing head. We have an extremely good impression of this very strong team, and we would be extremely happy that they play a very important role going forward. There is a lot to learn from Continental Building Products. Again, the fit in terms of the soft aspect has been extremely positive. Yes, we intend to rely a lot on the Continental Building Products teams to move forward.
After that, there are a lot of details on integration locally on different positions, but there is a lot to learn from them. Again, the integration will start very soon. We will have to wait after that, of course, for the close, but we will make sure that we prepare that very well. Again, west of Mississippi is a different story than east of Mississippi. Very strong leaders in Continental Building Products, and the early discussions we had with them were extremely encouraging in terms of the way forward, in terms of all the career opportunities also for the Continental Building Products beyond gypsum. When you were in that company, you had the choice of three plants. If you were a manufacturing or process engineer, you have access to 60 plants across certain cities in North America.
If you want to stay in the U.S., if you want to stay in gypsum around the world, you have 64 plants to go to work for. So many, many career opportunities for Continental Building Products, and we are going to rely a lot on their strengths, which is the early indication and early discussions we had with them.
On the transaction, why now? It is obvious that our underrepresentation, as Benoit said, in the U.S. market in gypsum is not something which has suddenly come to our mind. We consider that the timing is right today for this deal, and that's the reason why we are doing it now.
Thank you. We'll go to the next question from John Messenger from Liebherr. Please go ahead.
Hi. Good morning. Just actually, three I think one from me. Can I just be on the EBITDA? Can I just understand the EBIT being generated by Continental? Apologies if this is being covered already, but is it around the $90 million mark, as in there's about $40 million of annualized depreciation in there? Can I check from a fair value and accounting point of view, is that a similar level of depreciation we should expect on completion, or will you be revaluing the assets up and obviously the EBITDA down? Just to have an understanding of what you think the shape of this will look like in terms of its return profile before we add in the $50 million of potential synergies. Thank you.
Yes.
Thanks, Shreedhar.
We expect that the EBITDA would be in the range of $80 million. Yes, we would follow the accounting standards to revalue the assets. This is something which normally we have to do. Based on what we do on the purchase allocation, we would have an impact on the depreciation, additional depreciation of that. That is a process we will have to go through. It is a very rigorous process, and we will.
We have a look at it.
Yeah. We will have more clarity on that as and when we move forward on this acquisition.
Sorry, can I just come up just as a supplementary? The business last changed hands at kind of $703 million back. Okay. It was six years ago. Obviously, $1.4 billion today. Clearly, the deal to create value for shareholders needs the synergy number. Can I just understand how ultimately did you arrive at the comfort on the valuation? Is this DCS? Is this just about multiples and your synergy benefits? Just to have a bit of a flavor as to how you sat as a board and thought, "This is a fair value to pay.
I would say first, as you have seen on slide number 10, the company Continental Building Products today is totally different versus where it was five years ago. The returns have doubled, to give you an example. We looked at the value of Continental based on the intrinsic value of the company and the synergy that we add on top of it, knowing that we have been cautious and taking just the cost synergies, and therefore having below eight times EBITDA multiple, we think is a very attractive return and operation going forward for our shareholders.
Our internal criteria is to have a return on capital employed above our WACC of just three years, which we'll meet.
Thanks very much. Thank you. Next question, once again, from Jean-Christophe Lefèvre-Moulenq from CICMS. Please go ahead.
Yes. A follow-up question regarding the $80 million. It is the EBITDA of Continental or of CertainTeed Plasterboard?
No, no. It's EBITDA of Continental.
Okay. Could we have the.
Yeah.
Okay. Could we have also the EBIT of Saint-Gobain CertainTeed Wallboard in the U.S., maybe?
No. No.
No? Also, another question. Could we have an order of magnitude of the CapEx of the new entity, Saint-Gobain plus Continental in the U.S. in the midterm?
Benoit, the plants are well invested, so roughly 3% on sales.
2% on sales.
3% on sales, roughly.
Okay. Okay.
The same case for Continental Building Products. This is the case for ourselves as well.
Excellent. Many thanks. Merci, Benoît.
Thank you. Next question from Elodie Rall of JPMorgan. Please go ahead.
Hi. Thanks for taking my questions again. Just two small ones. Are there any restructuring costs that you are envisaging maybe in 2021? Second, on slide 11, could you confirm that all the EBITDA numbers on that slide are post-IFRS 16? Thanks.
I take your first question. We do not anticipate significant restructuring costs because, again, it is a growth project. Yes, there will be some costs associated with SG&A, but as you know, in the U.S., it is not significant. We do not anticipate material restructuring costs related to that transaction.
On IFRS 16?
Normally, at least for Saint-Gobain numbers, it's all IFRS numbers because we have applied the IFRS. I don't have a specific input on Continental IFRS details.
For this type of businesses, the challenges are not generally very significant. The biggest impact in Saint-Gobain was in distribution.
Okay. Thanks.
Thank you. We do not have any more questions for the moment. Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. It is zero and one on your telephone keypad. We have a new question from Eric Lemarié from Bryan Garnier. Please go ahead.
Yeah. Just a quick one from my side. I understood you said you consider yourself, before this deal, underrepresentative in the gypsum market in the U.S. And regarding the other construction product insulation, roofing, or ceilings, do you consider yourself underrepresentative in the U.S. today?
No. Good question. No, if I take all of those product lines one by one, we feel good. The positions we have, we were a bit low on ceilings, and we decided to make some specialty acquisitions on ceilings in the last 12 months. We did buy 100 glass ceilings and then wood specialty ceiling early this year. When you take CertainTeed as a whole, $4.5 billion will make us roughly number one or close to number one in building materials across North America. We have large customers, and I said the distributors are more broad in terms of the product lines they cover. CertainTeed is clearly a leader in terms of building materials across several product lines in North America.
Understood. Thanks.
Thank you. Next question from Sven Edelfelt from Oddo BHF. Please go ahead.
Yes. Hi again. Sorry. Just one last one. The Buchanan plant of Continental has had a significant malfunction, I think, in the U.S. earlier this year. Can you please elaborate on this?
Of course, that's something we checked in the due diligence. Frankly, I'm not a proper expert, but it was some breakage on the plant, which happened by a lot of bad luck coincidence. It has been fully repaired. It has been fully covered by their insurance. We discussed that with the head of manufacturing of Continental Building Products. It doesn't harm at all the capabilities of this plant. It was a combination of bad luck linked to, I would say, a malfunction from a third-party contractor. All that has been repaired. Frankly, the job that has been done by the teams to maintain the service to their customers, including in the very demanding New York area in the meantime, has been exceptional and again, a proof that the Continental Building Products teams are extremely dedicated to their customers in terms of service.
No risk or no downside going forward. Of course, we did ask and check that during the due diligence.
Okay. Thank you.
Thank you. We don't have any more questions for the moment. Ladies and gentlemen, if you have one more question, please go ahead and press zero one on your telephone keypad. It's zero and one on your telephone keypad.
Okay. Okay. I think we can take no more questions. We can conclude.
If there is no further question, I remind you that our full year results will be published on the 27th of February 2020. Thank you for participating in this conference call.
Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.