Expert guidance on building supply mergers and acquisitions
It’s a good time for buyers and sellers in the world of building materials, according to Andrew Petryk, managing director of Brown Gibbons Lang & Company and head of the company’s Industrials vertical. Petryk should know, as his firm has completed merger and acquisition (M&A) transactions for businesses representing a wide swath of industrial end markets. He works largely with companies that design, manufacture and market high value-add products, including those that specialize in residential and commercial building products.
Below, Petryk shares guidance on economic forecasts, homebuying trends and the state of play in M&A in 2024 and beyond.
Q: How are recent deals in the industry affecting investor confidence?
Recent M&A activity in the building products sector, driven by both strategic and private equity buyers, signals a bullish long-term outlook and is likely to bolster broader M&A across the industry.
2021 and most of 2022 were extremely strong M&A markets. Companies were performing well, benefiting from the pandemic-fueled fervor of building and catering to remote workers. Homeowners were adding home offices, upgrading living spaces, and installing swimming pools that needed decks and fences. There was very strong demand for products and services in the residential market.
As we got deeper into 2022, interest rates were moving dramatically, and there were heightened concerns of a recession in 2023. Many strategic buyers were predicting a 10 to 30 percent decline in 2023. In the last quarter of 2022 and the vast majority of 2023, buyers and sellers were on the sideline as the M&A market was frozen due to the bleak operating outlook.
As 2023 progressed, it was clear that the expected deep declines were not occuring. Then in late 2023 and early 2024, the deep freeze was over, as large deals at high values were announced.
Q: What’s some recent M&A activity that’s shaken up the building materials sector, and what’s the current M&A climate?
M&A activity in the building products market has been accelerating in 2024 and is well ahead of 2023 pace, with both strategic and private equity buyers showing renewed interest. Imminent rate cuts will drive additional M&A activity as demand for building products will likely improve further.
Positive sentiment is supported by several marquee deals this year, including:
- Masonite / Owens Corning
- PGT Innovations / Miter Brands
- SRS Distribution/Home Depot
- Tyman / Quanex
- Harvey / Cornerstone
- Beacon acquisitions
- White Cap acquisitions
Additionally, we’re seeing a growing interest from private equity buyers looking to capitalize on the long-term outlook for the building products sector and they are willing to pay attractive prices for quality businesses.
M&A activity is expected to remain robust as strategics and sponsors continue to look for acquisition opportunities.
All in all, momentum is continuing to build. Especially now that private equity is increasingly entering the fray, it’s a great time to be a seller of a high-quality business. High-quality companies are generating attractive valuations as buyers are paying a scarcity premium after 18 months of reviewing sub-optimal opportunities.
Q: What do you foresee with the housing market moving forward?
There’s a huge shortage of housing starts and stock available. The demographics are such that many more homes must be built. Housing stock is aging and will need repairs and renovations, so the long-term outlook for any kind of building materials is very positive.
Holding back the housing market is affordability and increased interest rates experienced over the last two years. Overall, inflation is still making it more difficult to afford basic essentials like food and clothing, so people are holding off on larger purchases.
Another issue is that empty-nester boomers, who historically downsized their homes as they aged, are staying in them longer. The existing housing stock is churning at a slower pace, driving the need for new construction.
Q: What’s your 2025 outlook on the building products sector?
The building products sector is poised for growth in 2025, based on the following considerations:
- Unprecedented deficit of housing that needs to be filled by accelerating the pace of new home builds.
- Moderation of home price growth improving affordability for new homes.
- Improved inventory levels as sellers return to the market.
- Continued trends toward smaller average home sizes.
- Stabilizing macroeconomic conditions (including interest rate cuts and reduced commodity volatility).
- Easing inflation.
- Improvement in consumer confidence.
As we sit here today, we expect 2025 to be very strong. There could be one if not two interest rate decreases, which will help relieve current mortgage rate levels. As we see 2024 being a relatively strong year for the economy, we expect consumers to be more confident. New home construction should pick up. The recession everyone expected in 2023 didn’t materialize, and recession fears have been overblown in 2024 as well .
Q: What are some big themes affecting investor sentiment in building products M&A today and moving forward?
After several years of supply chain disruptions and commodity volatility, building product business operations have largely normalized.
Investors would like to see housing starts stabilize (following a 16 percent year-over-year decline in July 2024) and to see building permit issuances improve.
Inventory remains tight, the median price of existing home sales are rising, and existing home sales have been trending downward (though they did rise slightly in July).
Investor sentiment is changing as more deals are being brought to market. The vast majority of building products we track are performing very well. In much of 2023, it was nearly impossible to get the attention of buyers, but that’s not the case in 2024.
However, with an election coming up, people are waiting to see what happens regarding the overall economy. Potential tax changes could impact cash flow at the household level (either positively or negatively) and determine how much stays in workers’ pockets.
Q: How can building products companies maximize their value in a dynamic, volatile housing industry landscape?
The valuation drivers don’t change over time. Quality management and high-quality services are essential. Customers want to know that items will be delivered on time and installed properly. Proprietary products can also differentiate companies.
Businesses are diversifying their product portfolios by introducing adjacent offerings and complementary services to differentiate themselves in the market. Many are also reducing new construction exposure and expanding repair, remodel and maintenance operations.
Service components of businesses have been highly attractive to the private equity community, as we’ve seen with consolidation activity within the roofing and cabinetry sectors. Luxury product offerings have also proved resilient in the current market environment.
Demonstrating mastery over cutting-edge technology also makes companies more attractive. Buyers are always looking for efficiencies. Higher levels of automation can enable better management of your vendor base and inventory. Design and engineering of new products all benefit from technology as it relates to software and management tools, whether it’s managing sales or communication with customers and employees. Getting ahead with technology can have a material impact in all functional areas of a business, but it’s crucial to be able to show your work rather than just touting buzzwords.
