Deals for building products companies, which provide materials for construction, have built a lot of momentum in 2014, partially because of the high expectations of future growth, says Ridgemont Equity Partners partner Rob Edwards (pictured).
These companies are attracting high valuations and investor interest, and construction spending is also up, according to data from the U.S. Census Bureau. Recent transactions in the space include Boston private equity firm Audax Group's purchase of Chase Industries, a door and related-products group, from New York PE firm Sentinel Capital Partners, and Spectrum Brands Holding Inc.'s (NYSE: SPB) acquisition of Tell Manufacturing Inc., which makes doors, locks and hardware.
Other players in the space include Beacon Roofing Supply Inc. (Nasdaq: BECN), which picked up All Weather Products Ltd., a roofing distributor, in August, and Kodiak Building Partners, which acquired construction material companies AO Inc. and Barnsco Inc., also in August.
"These companies' revenues and earnings were depressed in the recession and are expected to experience a meaningful rebound as the end markets normalize," says Edwards. In September, Ridgemont made a majority investment in the Cook & Boardman Group, which distributes metal and wood doors and other related products to the non-residential construction market.
Why are we seeing so much M&A activity in the building materials sector?
Many private equity investors are targeting building products companies due to their anticipated organic growth in the coming years. These companies' revenues and earnings were depressed in the recession and are expected to experience a meaningful rebound as the end markets normalize. Additionally, many building products sectors are fragmented and regional in nature, which should allow for consolidation as market leaders expand geographically to create scale. Investors in building products today are hopefully looking at several years of growth associated with the businesses, which allows for us to be more aggressive with our valuations. The middle market space is fairly competitive, and the building materials space as a sector is also competitive. Private equity firms are working hard to find the right management teams and platforms to pursue attractive investments in this market.
Are these companies receiving high valuations in these deals?
Building products valuations are fairly high, reflecting expectations for future growth in the industry segment and relatively high leverage levels. Buyers are willing to consider future revenues and profits expected for the companies in their valuations today. At some point building products revenues and earnings will normalize based on expectations about future growth, and valuations possibly could moderate at the time.
Are there specific types of companies that will make attractive targets?
In general, companies with residential end markets tend to experience improving results earlier than companies with nonresidential end markets. Therefore, we would expect deal flow to be more robust in the residential sector earlier in a cyclical recovery and then followed by nonresidential opportunities, typically 12 to 24 months later. At this point, the residential sector is still active in the M&A market and we are starting to see an increase in opportunities in the nonresidential sector.
When did this trend start?
Deal flow in building products started to increase in late 2013 and has continued to increase since then. Going forward, we expect similar deal flow for the balance of 2014 and early 2015, followed by more moderate levels of activity.
What attracted Ridgemont to Cook & Boardman?
We've been tracking Cook & Boardman for a number of years. The company was involved in two of our subsectors - building products and industrial distribution. We've been focused on residential and nonresidential building products sectors for the last several years, and Cook & Boardman is well positioned to grow in the coming years. It's a national provider of its services and we plan to expand into other markets through acquisition as part of our investment strategy going forward.
What are your plans for the company?
We are looking at other opportunities in the building products sector both as stand-alone opportunities and as add-ons to Cook & Boardman. For Cook & Boardman, they are involved in eight states and are a national provider, and we are looking to continue to build out operations in other states. We are excited about the organic initiative currently being pursued by the company. Additionally, we plan to pursue acquisition opportunities in selective markets as a way to expand the footprint. We would continue to evaluate additional products and services that could be added to the company. The industry cycle is helpful, but we are more interest in the company's growth initiatives as a way to create value for the company that just a cycle play.