New year, new M&A landscape
On the surface, 2008 was a very slow year for mergers and acquisitions in the prodealer arena, given the frenetic pace of previous years. Only one of the big players, Pro Build Holdings, continued making purchases, although these were fewer and farther between as the year wore on. Pro Build’s rivals began shedding locations in the back half of the year, sometimes selling lumberyards or service providers they had purchased only a year or two ago. Paradoxically, local independents—once the takeover targets of Building Materials Holding Corp. (BMHC), Stock Building Supply and Builders First Source—were able to pick up truss plants or other LBM facilities when the Big Guys packed up and left town.
OPPORTUNITY KNOCKS FOR SMALLER OPERATORSWhile most of the big pro dealers spent 2008 hoarding cash and unloading unprofitable locations, the dark year held a silver lining for some smaller operators. While their revenues were also down, these family owned businesses didn’t have to worry about fickle investors or warnings from the New York Stock Exchange about its listing requirements. A few had enough money socked a way to buy up a competitor’s lumberyard or truss plant when it came on the market. At the very least, they stood to gain market share when Stock, 84 Lumber, BMHC and others pulled out of town.
Kuiken Brothers, a chain of nine lumberyards and design centers in northern New Jersey and southern New York, purchased a home center called Lumber 1 in Roseland, N.J., expanding its footprint into Essex County. “We look at the geographic areas and territories that would add to the overall value of what we do,” owner Doug Kuiken told Home Channel News.
John Shirley, president of Barr Lumber in Southern California, allowed that July 2008 wasn’t the best time to acquire Pick’s Building Materials, a one-unit dealer that serves the San Gabriel Valley east of Los Angeles. “[Sales> have been absolutely horrible,” Shirley said. “But in this business, you have to take the opportunities that come along to expand. The long-range opportunities make it worth the risk.”
Hartville Hardware, located halfway between Akron and Canton, Ohio, was able to expand its millwork assortment by purchasing Schumacher Lumber, a nearby competitor that went out of business. “We were able to pick up their sales, which also gained us some new customers,” said Scott Sommers, Hartville’s general manager of building materials, in an interview last August.
Mark Rippe, president of Nisbet Brower in Cleveland, had always wanted to operate his own components plant instead of outsourcing the work. He got his chance—twice—when a roof truss facility and a wall panel factory came on the market last summer, within two weeks of each other.
Rippe bought both of them. “This fulfills our vision of the company,” Rippe told Home Channel News shortly after moving all the equipment into one location.
Then came the credit market implosion, which pushed the world of finance into a deep freeze. But the thaw has already started, M&A advisers say. Distressed sellers, “inbound interest” from foreign investors and private equity funds are all looking to make deals in the LBM sector. But these transactions won’t be structured in the traditional ways, they warn; the rules of engagement have changed since September.
PIPE deals (private investment in public equity), where private investors put money into public companies in exchange for preferred stock, may enter this space. Stock for stock trades that merge companies together are another possibility, given the fact that senior lenders are still holding tight to their wallets.
“We’re seeing a lot of private equity loan to own,” said Nick Beare, head of the building products group at Stephens Inc. In “loan to own” deals, investors are buying debt-ridden companies knowing they may soon own them. “It’s a debt play versus an equity play,” Beare explained.
Beare and other M&A advisers who work in the construction sector say they are busier than ever: nobody wants to sell right now, given the low multiples, but plenty of companies are exploring that option. Private equity is having trouble securing capital for big deals, but it still has to find a way to put its money to work.
“We did 10 deals last month,” said Andrew Bohutinsky, managing director of the building construction group for Lincoln International. While some of these involved forced sales by lenders, others involve buyers who see a bottom to the housings lump in 2009.
“Now, and over the next six months, is the best time to buy,” Bohutinsky said. “The bottom is visible.”
How much these businesses will sell for, and who will ultimately own them, remains to be seen, however.
Before the freeze
The beginning of 2008 was not yet a buyer’s market, at least not in the mind of most lumberyard owners. Sellers were still asking high prices, more than many buyers were willing to pay.
“The [pro dealers> were still hoping for multiples of eights and nines,” Beare said. “They were hanging on to yesteryear.” The high prices, combined with the “falling knife” of plummeting housing starts, put off most buyers, Beare said.
One obvious exception was Pro Build, which continued to build its nationwide net work of lumberyards and truss plants. But even the Denver-based pro dealer, owned by Fidelity Investments, was selective, slowing down its pace as the buildings lump wore on. In January, Pro Build purchased Granger Lumber-Hardware, a two-unit dealer in Jackson, Fla. Pro Build is especially interested in Florida, where it made 13 acquisitions in 2007, and Jacksonville added a top 25 market to the fold.
Pro Build only made on e acquisition in the second half of the year, but it was an unusual one. The company purchased CTX Builders Supply, the distribution arm of Centex Homes. During better times, the Dallas-based home builder was able to supply its own construction projects through these strategically situated lumberyards, saving money through direct buys from manufacturers and mills.
Pro Build will continue servicing Centex, one of its best customers, from its former yards. The pro dealer will also be able to sell to other builders and contractors from five additional locations: Albemarle, N.C.; Plant City, Fla.; Buda, Texas; Carrollton, Texas; Visalia, Calif.; and Phoenix.
Florida, where Pro Build has focused much of its M&A activity, said good-bye to BMHC last year. Executives at Wolseley, the parent company of Stock Building Supply, have vowed to hold on to operations in top states like Florida. But the U.K. firm’s last round of consolidations closed Ft. Myers, Jacksonville, Panama City and Pompano, Fla.
Builders First Source, the industry’s 9th largest player, put the brakes on acquisitions this year in an effort to preserve cash. In the beginning of the year, the company told investors they were still open to the idea of making purchases.
“We are still obviously very, very conscious about conserving our cash,” Builders First Source CEO Floyd Sherman told an analyst on an April 25 earnings call. “But at the same time we are looking at acquisitions. I have a number of them right now on my desk. I still have not seen the pricing drop to what I think is a realistic level, given the conditions of our industry. I think it’s going to take probably another three to six months before we really start seeing pricing for the businesses get in line with where the values should be reflected.… So I think there is another three to six months to go before anything meaningful will develop, atleast from our standpoint regarding acquisitions.”
Three months later, at the company’s second-quarter earnings call, an analyst asked if Builders First Source was still interested in “buying things cheap when the market had bottomed.”
“Liquidity is still the key,” answered CFO Charles Horn.
By the third quarter, analysts had stopped asking about acquisitions.
After announcing a major consolidation in May, BMHC began closing and, in some cases, selling off operations in California, Arizona, Florida and Virginia. Many of these locations were framers, concrete pourers and other construction services purchased under the SelectBuild banner.
Stock Building Supply, No. 2 on the Pro Dealer Top 350 Scoreboard last year, was also selling off its former acquisitions, many of them purchased during a buying spree in 2005 and 2006. Parent company Wolseley, exasperated over mounting losses, shook the industry in October by announcing plans to close 30 percent of Stock’s locations, approximately 85 branches. Even more shocking was the admission that Wolseley had tried, unsuccessfully, to sell its U.S. building materials division.
Analyst Keith Hughes of Sun Trust Robinson Humphrey predicts that “more [big> players are going to have to make an announcement like Stock.”
The next few months are going to be “a blood bath for closed [LBM> locations,” according to Hughes.
“The reality is Pro Build can’t buy everyone,” Hughes said. “Liquidations are going to mount as a significant portion of the industry needs to go away.”
Two-step slowdown
Falling lumber prices created a double whammy for LBM dealers last year, a situation not shared by their peers in the roofing and exterior building products channel. But distributors like ABC Supply and Beacon Roofing Supply kept a low profile last year; both reported no acquisitions. Bradco Supply brought in a private equity investor this summer, Advent International, a company that specializes in middle market buyouts. Advent now owns a majority stake in the Avenel, N.J., company.
AT A GLANCE2008 Mergers & Acquisitions
ProBuild
Granger Lumber-Hardware, a two-unit dealer in Jackson, Fla.—January ’08
Jasper Lumber, which ran two lumberyards, a truss plant and a millwork manufacturing facility in the Atlanta area—February ’08
Columbus, Ohio-based Khempco, comprised of a lumberyard, two truss facilities and a commercial door shop—April ’08
Northeast Panel & Truss and Collins Truss, New York’s Hudson Valley—March ’08
Big Buck Building Centers, Racine, Wis., a lumberyard, truss plant and millwork facility that served the Milwaukee and Chicago markets—July ’08
CTX Builders Supply, the distribution arm of Centex Homes. This brought five additional locations: Albemarle, N.C.; Plant City, Fla.; Buda, Texas; Carrollton, Texas; Visalia, Calif.; and Phoenix—October ’08
Bradco Building Supply of Avenel, N.J., brought in a private equity investor named Advent International. It now owns a majority stake in Bradco.
PrimeSource purchased 3-G’s Supply in Cleveland; Miami-based Coast to Coast Building Products (with warehouses in Pompano Beach, Orlando and Tallahassee Fla.; and Atlanta); and Compass International, an Anaheim, Calif.-based fastener manufacturer with locations in Des Plaines, Ill. (near Chicago); Spring, Texas (outside of Houston); and Doraville, Ga. (near Atlanta).
Alpine Lumber, the 15-yard pro dealer in Westminster, Colo., purchased five yards (in Angel Fire, Gallup, and Farmington, N.M.; Durango and Crested Butte, Colo.) from Las Vegas-based A.C. Houston.
Chase Lumber, in Aurora, Colo., sold to Brooks, Houghton & Co., a private equity firm, on April 8.
Kuiken Brothers, a chain of nine lumberyards and design centers in northern New Jersey and southern New York, purchased a home center called Lumber 1 in Roseland, N.J.
Barr Lumber, in San Bernardino, Calif., acquired Pick’s Building Materials, a one-unit dealer that serves the San Gabriel Valley, a collection of suburban communities directly east of Los Angeles, in July ’08.
Hartville Hardware, in Hartville, Ohio, purchased Schumacher Lumber.
Nisbet Brower in Cleveland, purchased two component facilities, making roof trusses and wall panels.
PrimeSource Building Products was one active player in the distribution channel last year. It strengthened its position in the Cleveland market by purchasing 3-G’s Supply, a family own ed fastener wholesaler founded in 1974.
“The last three years have been the best in the history of the company, and it’s better to do something like this on the way up than on the way down,” owner George Miller told Home Channel News in February.
PrimeSource made two other acquisitions last year: Miami-based Coast to Coast Building Products (with warehouses in Pompano Beach, Orlando and Tallahassee, Fla.; and Atlanta) and Compass International, an Anaheim, Calif.-based fastener manufacturer with locations in Des Plaines, Ill. (near Chicago); Spring, Texas (outside of Houston); and Doraville, Ga. (near Atlanta). The Carrollton, Texas, building products distributor ended the year with 37 branches throughout North America.
Allied Building Products, a privately held roofing distributor that ranks in 6th place with $2 billion in annual sales, had a “slower year than most,” according to Kevin Hawley, vp-corporate development. “Although we did multiple acquisitions, we didn’t do as many as in previous years,” he said. (Hawley declined to give an exact number, although he did say that a busy year for Allied is eight to 10 acquisitions.)
“People assume that when the economy gets tough, business owners want to sell,” Hawley said. “[But> this particular economic cycle is not the best time.”
But the rules of finance are changing as the recession spreads. “A lot of otherwise well-run businesses have been impacted by their bank’s lending policies,” Hawley said. Companies that relied on a loan from the local bank to get them through the slow season are having their credit lines pulled. “The lending decisions have been taken out of the [local> bankers’ hands,” Hawley observed. With little revenue from sales and no borrowing ability, these companies have few alternatives other than put ting themselves up for sale—and hoping someone comes along to buy them.
Many dealers simply liquidated the inventory, sold off the equipment and locked the doors. Some of the bigger players like Stock, 84 Lumber, Builders First Source and BMHC chose to sell the real estate or simply buy out the leases rather than hand over market share to a competitor.
With housing starts at 625,000 units a year (and falling), Wall Street analysts fore see more consolidation throughout the pro dealer channel. “The industry just has too many distribution points for a continually shrinking home-building pie,” said Hughes of Sun Trust Robinson Humphrey. M&A adviser Bohutinsky pointsout that public companies still have the option of going private—as long as they can find a private investor to come in and rescue them.
“Some of these businesses are worth one-half to three-fourths of what they once were,” observed Beare of Stephens Inc. “They’ve done all they can do to ride out the storm, and now the credit crisis had made it impossible to refinance.”
Any dealer coming on the market in the next six months is likely to be a “distressed” sale, Beare said. “No one is going to sell today, at the multiples now, unless they really have to.”
