What’s Next for Building Materials M&A?

• COVID-19 took a toll on all industries, but building materials and construction were among the sectors that did well during the pandemic.

• Because of the sector’s resilience, consolidation saw a boost in activity as both strategic and financial buyers targeted sellers of all sizes.

• The sector is now eyeing further consolidation as the big strategics get bigger and well-capitalized platforms add bolt-ons to their offering.

• As we eye the end of the pandemic and the future M&A deals, there are some strategic considerations for buyers and sellers in any vertical. 

The construction business was undeniably upbeat in 2020. While COVID-19 decimated myriad industries — restaurants, airlines and entertainment venues, for example — the pandemic proved positive for building materials distribution. Companies that supply new residential construction projects, but also repair segments, benefited from more people staying home and, therefore, investing in their properties or upgrading their properties. Likewise, related industries such as HVAC, landscape, pool & spa, roofing and others saw revenue growth as the channel kept humming.

Because the sector was so healthy, M&A continued at a rapid clip, with high-profile acquisitions announced against a dearth of deals in other verticals.

Once the mid-March to May pause ended, the building materials and construction sector indeed saw activity blossom with deals of all sizes and structures. Large, small, strategic, financial — every type of company in the category was in play, leading to two of the key M&A themes for the second half of 2020 and into the first four months of 2021.

One, private equity firms made, and continued to make, headlines for the staggering amount of capital they’ve continued to invest in distribution — especially building materials and construction. Top deals of the past nine months:

• Clayton, Dubilier & Rice bought HD Supply’s White Cap division for $2.9 billion.

• Clearlake Capital Group L.P. acquired PrimeSource from another PE firm, Platinum Equity. PrimeSource has gone on to be acquisitive.

• Affiliates of American Securities LLC paid $1.4 billion for Foundation Building Materials Inc. and $850 million for Beacon’s Interior Products Business.

• Bain Capital Private Equity bought US LBM Holdings for an undisclosed amount.

But it wasn’t just PE firms deploying dry powder that helped reshape the sector. Plenty of strategic moves were announced, including The Home Depot acquiring building products distributor HD Supply Holdings Inc. for $8.7 Billion. It was a homecoming of sorts for HD Supply. In 2007, Home Depot had sold the business to private equity, and HDS went public in 2013, operating on its own for the last seven years but slowly shedding business division until it went back to its core focus and to its original owner.

The other big strategic move to occur during COVID-19: Builders FirstSource acquired BMC Stock Holdings for $2.5 Billion. The companies entered into a definitive merger agreement under which Builders FirstSource and BMC will combine in an all-stock merger transaction valued at $2.5 billion. The deal united the No. 2 (BLDR) and No. 5 (BMCH) companies on MDM’s 2020 Building & Construction Top Distributors list.

M&A tips — for any sector

But what to make of all this activity? How does increased volume in one vertical impact others? And are there lessons to be learned for industrial, electrical or other categories? MDM gathered some industry experts to discuss these very topics at our recent M&A Virtual Summit.

In a panel, “Making Sense of Construction Supply’s M&A Fever,” moderator Craig Webb, president, Webb Analytics, led a panel of executives that included: Chris Miller, President & CEO, Nation’s Best Holdings LLC; Michael Collins, Managing Director, Building Industry Advisors LLC; and Craig Cowart, CEO, Fulcrum Building Group LLC. Their consensus: The market was hot because the building materials sector was hot. Also, it remains attractive for buyers and sellers with no signs of slowing down. And while their expertise is in building materials, the lessons they shared during their 45-minute panel discussion can be extrapolated across distribution. Here are a few of the insights they offered about the acquisition climate, including tips on how to read the market.

One, it is a buyer’s and a seller’s market, according to all three of the panelists. “It’s both,” Miller said. “Sellers are coming off a very strong financial 2020. If they had been thinking about selling at some point, it’s a heck of a year to try to throw financials out there and put multiples on top of that. But there are a lot of people looking to divest the business at this point.” What does this mean? Deals could — and should — be a “win-win” for both parties.

Two, a buyer is going to kick a lot of tires before finding the right fit. Buyers vary in terms of the percentage of deals that get done relative to how many conversations they have — 1 in 10, 1 in 20, 1 in 100 — but the concept of qualifying a seller to meet a buyer’s geographic, financial and management criteria has grown more complex with all the post-pandemic noise out there.

Three, how a business is managed is the most important factor in a sale. Yes, how well a distributor navigated COVID-19 regarding the top and bottom lines is important, but “there are certain fundamental things that buyers look for that have not changed,” said Collins. “They look for strong management, they look for companies that are already profitable. Very few of the buyers that we work with are interested in doing a turnaround where they’ve got to come in and fix a broken business.”

Four, buyers are going to look at how a potential seller navigated the COVID-19 crisis. “Everybody wants to know how a business reacted to COVID,” said Collins. “Frankly, I believe that some of the things buyers are listening for are what thoughtful steps did owners take to protect their workers. Did they act quickly? Or did they sit there bewildered? That’s a test of future ownership.”

Five, now is a good time to sell for a variety of reasons. However, deciding to sell now or down the road is a question each seller must evaluate, Cowart said. “It depends on what you’ve invested in your business recently, how well-positioned you are. There is a constant evolution of a customer’s expectations and is your business positioned to weather the future? Equally important as ‘What can I get today? is ‘What could my business be worth tomorrow?’ A lot of times selling today might make sense in case the run doesn’t continue.”

And six, while now is a good time to sell, the right price for a business is hard to pin down due to COVID-19, especially with sellers expecting more than they might be worth. “Most of the people we speak with have a realistic expectation,” Miller said. “They know they had a big year last year, but they also know we’re going to look at [revenue of] previous years, too.”

More M&A considerations

Those aren’t the only M&A themes that have emerged during COVID-19, of course. There is the ongoing concern over pursuing “de novo” deals, meaning a transaction in which a seller targets a business they know nothing about. In the ongoing environment of social distancing, those deals remain fewer and far between.

Then there’s due diligence. The deal-making process is forever altered, with the likelihood of initial or even down-the-road meetings happening over Zoom or Teams or Webex.

“I think buyers and sellers have gotten more and more comfortable with the ability to not only execute a lot of the work streams that have to happen in terms of the information sharing and the diligence side of the equation, but also the interpersonal side of getting to know a potential partner,” said Nick Troyer of Baird on another M&A Virtual Summit session. “That is certainly not ideal — and I think we’re all hoping that a lot of this can move back to in-person sooner than later — but what it has done is introduced efficiencies into a process, and one result has been shorter execution timelines.”

Another issue: Potential change in the tax laws. Brent Grover, M&A adviser for Brent Grover & Co., touched on the topic during the investor panel, “Is Your Business an Attractive Target?.” Grover said he was advising his clients to review the proposed tax changes under the Biden administration, as well as changes in state taxes. Motivators for selling all or part of a business included the need for more money to grow profits, succession plans and changes to the capital tax gain rate.

Collins also discussed this during the building materials panel. He said this is a critical consideration for businesses and it should play into whether a potential seller lists their business this year or down the road. “If you think you’re going to sell two years from now, four years from now, you can start to look at the estate planning,” he said. “If you’re going sell in a year, call an estate planning attorney now because it takes time and could slow down the sale.”