Mohawk grows top line with Dal-Tile

CALHOUN, GA — Sustaining a pattern of growth through acquisition it has followed for nearly a decade, Mohawk Industries will acquire ceramic tile manufacturer and importer Dal-Tile International in a deal that will add $1 billion in annual revenues to the company's $3.3 billion coffers in 2002, when the deal takes effect.

While Mohawk expects to meet its $600 million projections for home textile sales by yearend, the Dal-Tile acquisition will reduce the role of soft goods next year to 14 percent of total company sales from the roughly 18 percent contribution it makes this year.

But Jeffrey Lorberbaum, president and ceo, said the importance of its home textile business — the 4th largest in the U.S. — is not "de-emphasized" by the merger.

"We have different segments of business aimed at different channels," Lorberbaum said during a conference call to discuss the deal. "This one sits with our distribution for hard surface. It does not reduce emphasis on our textiles or home products."

Lorberbaum added that the company will continue to pursue other mergers within all of Mohawk's product categories as opportunities present themselves.

"If we see an opportunity, we'll look at it," he said. "We just want to make the most money we can make and add the most value for our customers."

The Dal-Tile acquisition is Mohawk's 14th since 1992, and the company has maintained a pace of acquiring at least one business annually over the past 10 years. Its most recent purchase was the 2000 acquisition of Crown Crafts' $85 million woven products division, a deal that positioned Mohawk as the nation's largest throw supplier.

Likewise, the purchase of Dallas-based Dal-Tile — the largest U.S. manufacturer and marketer of ceramic tile — immediately makes Mohawk Industries the leader in the growing hard surface business and a more formidable presence in the floor coverings industry.

Dal-Tile holds about a 33 percent share of the commercial tile market, but only about 15 percent of the residential market, according to an analyst report from Credit Suisse First Boston. Mohawk can expand that residential business through its distribution network of 20,000 independent dealers of residential replacement carpet. Mohawk also is the leading supplier of residential carpet to powerhouse The Home Depot.

Another bonus, Lorberbaum said, is the potential to use Dal-Tile's Mexican management team to boost sales of Mohawk products in that country. He added there is a possibility that Dal-Tile's Mexican facility could be used in the future to manufacture some Mohawk soft goods — with the exception of carpet.

The merger was unanimously approved by the boards of both companies. Mohawk will pay approximately $1.66 billion for the company, 50 percent in cash and 50 percent in stock. The agreement includes the repayment of roughly $261.7 million of Dal-Tile's debt.

Based on the closing price of Mohawk's stock on Nov. 19, Dal-Tile shareholders would receive $23.01 per share in cash and Mohawk stock.

The cash portion of the transaction will be financed through a combination of existing Mohawk credit facilities and new debt. The transaction is expected to be completed in the first quarter of 2002.

"We will work on developing an operation strategy over the next four to six months and implementing it in early 2002," Lorberbaum said during the conference call. "We believe most synergies will be impacting in 2003, when the economy will be taking a turn for the better."

When asked to comment on competitor Burlington Industries' recent filing for Chapter 11 bankruptcy, Lorberbaum said it "has not affected our business significantly. We have competitors in trouble and not in trouble all the time. We don't like seeing any of our competitors in trouble. But we try to maximize our market share in each piece."

Credit Suisse First Boston, which quickly issued a report following the announcement, concluded that the acquisition will be "only modestly accretive to our 2002 earnings estimate of $3.40, but [we] expect synergies to result in earnings accretion in 2003."

The report noted that Dal-Tile sells mostly to the new construction and commercial markets, while Mohawk's penetration is greatest in the residential replacement market for floor coverings. "The two companies' distribution strengths are complementary," the report concluded.