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THE M&A MARKET has been operating in a wait-and-see mode for the first half of 2023 as buyers, sellers, and lenders look for greater clarity in the macroeconomic environment. Recent headwinds impacting the economy, inflation, and interest rates have had a cooling effect on the deal market and are tempering financing and valuations. In the Building Products market specifically, businesses directly tied to new construction have experienced greater pullback in demand as investors assess the impact of housing starts reverting from record highs experienced in early 2022:
- There is a continued flight to quality and increased front-end diligence with the challenge of evaluating the sustainability of recent performance as a key gating item. Dissecting real versus nominal growth is often the first and most critical item evaluated.
- A gap in valuation expectations exists between buyers and sellers, creating a disconnect in the market and leading some parties to wait for valuations to normalize.
- Debt markets are evolving. Lenders continue to show appetite for high-quality assets but are responding to market uncertainty in the form of reduced leverage and higher pricing. With reduced leverage, private equity sponsors are required to put more equity into deals with the commitment typically higher for transactions involving businesses heavily tied to the new construction market. Traditional bank financing has tightened with the void being filled by non-bank lenders which remain open for business.
Increased visibility will incite greater optimism into the M&A market and incentivize sidelined buyers and sellers to transact. Over the near-term, the market could see an easing of mortgage rates under the expectation of lower inflation, while recent positive trends in housing starts hold promise that the market may be entering a period of stabilization. Looking ahead, the long-term outlook for the residential new construction market remains favorable, underpinned by strong demand from an aging housing stock and a significant deficit of affordable single-family homes.
Despite the headwinds facing the market today, capital availability, which there is more than an ample supply of today, will continue to keep buyers in the market. Strategic acquirers are sitting on stockpiled cash and need to show growth, while private equity has put little dent in the oft-cited capital surplus ($800 billion+ reported by PitchBook at the end of Q3 ’22), with add-on acquisitions vital to platform buy-and-build strategies. Recent Building Products M&A activity reflects a healthy mix of strategic and private equity buyers, indicative of the appetite to put money to work.
In June 2023, PGT Innovations acquired the remaining 25% ownership interest in Eco Enterprises (Eco), a manufacturer of aluminum, impact-resistant windows and doors primarily serving the south Florida region. “We’re very excited to reach the finalization of this purchase as it will allow us to further serve high growth markets in which we operate,” said CEO Jeff Jackson, commenting on the transaction. PGT Innovations acquired a 75% equity stake in Eco back in 2021. In addition to realizing revenue growth and margin expansion, PGT Innovations added glass production capacity, furthering its vertical integration strategy.
Simpson Strong-Tie acquired Pieresearch in June, expanding its offering of concrete products in the commercial market. Pieresearch is a manufacturer specializing in non-corrosive plastic rebar reinforcing alignment and centralizer products for the deep foundation and earth retention industries.
In May, Builders FirstSource completed the purchase of Georgia-based JB Millworks, a manufacturer, distributor, and installer of millwork whose product offering includes doors, windows, stairs, rails, columns, posts, and trim. The acquisition adds value-added capacity in the Chattanooga area. The transaction followed the April purchase of Builders Millwork Supply, a millwork distributor serving home builders and remodelers throughout South Central Alaska.
Pella Corp. announced in May it is acquiring Lawson Industries. With the acquisition, Iowa-based Pella will expand into South Florida, adding to its capabilities in impact-resistant aluminum windows and doors. Lawson Industries has been serving the Florida market for more than 60 years and will continue to operate under the Lawson brand name post-acquisition. Pella’s other Florida brands include Pella, Custom Window Systems (CWS), and Avanti.
Strategic buyers are also reshaping their portfolios and divesting underperforming and non-core assets to strengthen their balance sheets and enhance earnings. In June, ASSA ABLOY received antitrust clearance to purchase the Hardware and Home Improvement division (HHI) of Spectrum Brands, a transaction previously announced in 2021, for $4.3 billion. HHI is a manufacturer of complementary security, plumbing, and builders’ hardware products that will accelerate the expansion of ASSA ABLOY’s residential business in North America and advance its digital transformation. The business operates manufacturing facilities in the United States, Mexico, Taiwan, China and the Philippines.
In April, Jeld-Wen announced it is exiting its Australasia window and door business, selling to Platinum Equity, an operationally oriented private equity sponsor with significant experience in the Building Products industry. The business operates from 41 manufacturing locations across Australia, Malaysia, and Indonesia.
We anticipate the markets will remain cautious during the second half of 2023 for Building Products M&A, although that could change if inflation and mortgage rates cool at a quicker pace than expected. A pipeline of deals is growing in Building Products, and there is going to be a first-mover advantage to buyers standing ready to capitalize and acquire high-quality companies at reasonable prices before the bidding war begins. MM
Andrew K. Petryk is a managing director and leads the Industrials practice at Brown Gibbons Lang & Co., an investment banking and corporate financial advisory services firm serving the global middle market. Reach him at email@example.com.