Unless banks ease their lending covenants, Britain's Wolseley Plc will need to close Stock Building Supply, America's No. 2 LBM operation, if it hopes to survive, the investment firm Goldman Sachs said in an analysis made public yesterday.

Goldman made its comments while lowering its rating on Wolseley to "sell" from "neutral." Several London-based news services are reporting that Wolseley is expected any day now to announce a 1 billion pound sterling ($1.4 billion) rights issue to help it meet its loan terms.

"We calculate that in order to stay comfortably within its banking covenants, Wolseley will need to issue between 750 million and 1 billion pounds of equity and close its loss-making Stock business," Goldman's report said. It noted that a rights issue would dilute the value of current Wolseley shares and, by itself, would only narrowly push Wolseley back into compliance with its banking covenants, leaving it little room to maneuver and no ability to buy weaker competitors. At the same time, "the benefit from closing a loss-making business (i.e., Stock) would more than offset any potential dilution from an equity issue in the near term, but would remove the longer-term benefits that would have accrued from the eventual upswing in the U.S. residential markets."

The Dow Jones News Service reported that Wolseley has debts totaling 3 billion pounds. The Independent of London quoted Howard Seymour, an analyst at Numis Securities in London, as saying that a rights issue without definitive action on Stock is unlikely to be successful.

In January, Wolseley announced that Stock recorded an operating loss of $110 million for September through December 2008, double what it did a year before. In October, Stock launched a $225 million restructuring effort in which it closed 86 facilities, cut 3,000 jobs, and exited 16 markets in six states.

In a ProSales interview with Stock executives during the International Builders' Show, Stock president Joe Appelmann said Stock now has 207 facilities and just fewer than 8,700 employees in 52 markets. That's a marked drop from its 363 facilities and 13,120 workers at the start of 2008.

Stock ranks second on the ProSales 100 list of the nation's largest LBM operations, with sales in 2007 totaling $4.7 billion, 94% of them to professional builders.

Craig Webb is editor of ProSales magazine.