Mohawk Buys Dal-Tile for Tile Sales

Rug and carpet maker Mohawk Industries Inc. said it would buy ceramics tile maker Dal-Tile International Inc. for about $1.4 billion in cash and stock in a bid to become a leader in the fast-growing ceramic tile sector.

In a deal announced late Monday, Mohawk said Dal-Tile, which makes floor, wall and mosaic tiles under the Daltile and American Olean brands, would allow it to offset declining carpet sales and offer the most comprehensive line of ceramic tile and stone products in the flooring industry.

Analysts said that carpeting is losing market share as consumers turn to hard floor surfaces that are easy to clean and aesthetically pleasing.

"There's no question that the long-term trend is for slower growth in carpeting, which is losing share to hard surfaces," said Joel Havard, a consumer durables analyst at BB&T Capital Markets in Richmond, Virginia. "(Tile) is cost effective, it's clean, it's got a lot of design flexibility. These are a lot of things that consumers are looking for."

Shares of Dallas-based Dal-Tile were up $3.78, or 21.5 percent, to $21.38 in midday trade on the New York Stock Exchange. Shares of Mohawk, headquartered in Calhoun, Georgia, fell $5.29, or 10.3 percent, to $46.09 on the NYSE.

People are using tile in more areas of their home and are even upgrading to natural stone tiles made of marble and slate for aesthetic reasons, analysts said.

Havard said the flooring industry is growing at about 5 percent per year, while tiles have been growing at about 7 percent per year.

Low U.S. Tile Consumption

There is still room for growth, though, as tile becomes more accepted and more available in the United States, said David Jarrett, analyst at Credit Lyonnais.

"Consumption of tile per capita in the United States is significantly lower than in almost any country in Europe," Jarrett said. "Tile consumption in Europe is a lot more accepted. I envision expansion of per capita consumption of tile in the United States over the next decade."

Besides increasing its existing tile offerings, the deal will also allow Mohawk to used Dal-Tile's Mexican management team to increase Mohawk's sales in Mexico and possibly manufacture products there, the companies said.

Under the deal, Dal-Tile shareholders will get roughly half cash and half debt, or about $11 in cash and 0.2414 shares of Mohawk stock for each share held. The price is subject to change depending on Mohawk's share price. Based on Mohawk's closing price of $51.38 on Monday, Dal-Tile shareholders would receive $23.10 a share in cash and Mohawk stock.

The deal was valued Monday at $1.66 billion, including the repayment of $261.7 million in Dal-Tile debt, Mohawk said.

Mohawk said that the exchange ratio would increase to 0.2716 Mohawk shares per Dal-Tile share if the Mohawk stock price falls between $41 and $36.45. The ratio will fall to O.2213 if the Mohawk stock price is between $50.12 and $54.67.

The company said the cash portion of the deal will be financed through a combination of existing Mohawk credit and new debt. It expects to close the deal in the first quarter of next year.

Mohawk, which sells some ceramic tile and other floor coverings, said in October its third-quarter earnings rose 20 percent as sales growth in its soft non-carpet products and hard-surface products offset a small reduction in carpet sales.

In 1999, the floor covering industry had wholesale sales of $19 billion, with ceramic tile accounting for about $1.88 billion, according to Havard. In 2000, ceramic tile wholesale sales were about $2 billion, a 6.5 percent increase in dollar terms and 13 percent in area.

Mohawk said it plans to nominate two Dal-Tile representatives to its board and keep the company's operating management team in place.

It also said the acquisition had been approved by the boards of both companies, but still requires stockholder and regulatory approval.