Building Products M&A Update – August 2024

Long-Term Tailwinds Fuel Acceleration in Building Products M&A, Particularly Among Financial Buyers

While elevated interest rates and an inflationary environment have continued to weigh on near-term sector growth, buyers’ faith in long-term growth trends has accelerated Building Products merger and acquisition (M&A) activity through year-to-date (YTD) 2024. Notably, after experiencing 18 consecutive months of growth, month-over-month (MoM) construction spending has stalled, falling 0.4% in May and a further 0.3% in June, according to the St. Louis Federal Reserve.¹ The MoM decrease in June has been attributed to spending declines across all major categories: private residential (-0.3% MoM), private nonresidential (-0.1%), and public nonresidential (-0.4%), according to the U.S. Census Bureau.² The higher-for-longer interest rate environment has stalled momentum within overall nonresidential construction to-date, with tightened project financing conditions expected to further pressure rate-sensitive end markets like Commercial (-1.0% MoM) in the near-term. However, growth trends remain positive for other nonresidential end-markets, including Data Center, Infrastructure, and Manufacturing, due to public funding from the Infrastructure Investment and Jobs Act (IIJA) and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act. In a similar vein,  high borrowing costs for home buyers and developers alike have seen new residential construction starts fall 4.2% quarter-over-quarter (QoQ) and 7.4% (YOY) as of Q2 2024, with single-family housing starts declining to an eight-month low (-2.2% MoM) in June, according to the U.S. Census Bureau.³ Of note, the past couple of months have seen volatility in the average U.S. 30-year mortgage rate, peaking at 7.2% in May and bottoming out at 6.5% the first week of August, according to the St. Louis Federal Reserve.⁴ While elevated input and borrowing costs are expected to continue to stunt residential and nonresidential construction in the near-term, government-funded infrastructure spending and a chronic shortage of single-family homes across the U.S. has supported optimism surrounding a longer-term rebound in sector growth.

Despite a slowdown in U.S. construction spending, regional construction backlog data has revealed strong pockets of the market. As of June, backlogs across the U.S. have averaged 8.4 months, according to Associated Builders and Contractors (ABC).⁵ Average U.S. backlogs fell 0.5% YOY, stemming entirely from a 1.5% and 0.7% YOY decline from the Midwest and Northeast regions, respectively. However, average backlogs in the West remained on par with the U.S. average and the South exceeded the national average, standing at 9.5 months as of June. Population migrations to warmer, urban regions kickstarted during the COVID-19 pandemic have helped bolster construction backlogs across the sunbelt. Capstone anticipates that strong backlogs in high-growth regions across the U.S. will continue to bolster growth and M&A activity across the broader U.S. Building Products sector in the long-term.

An elevated interest rate environment has also exacerbated the ongoing affordable housing crisis across the U.S., intensifying the need for new residential construction. Prime mortgage rates locked-in during the COVID-19 pandemic have left homeowners unwilling to put their homes on the market. As a result, a shortage of previously-owned homes for sale coupled with a slowdown in new residential construction have kept average home prices elevated. As of Q2 2024, average prices for new homes sold in the U.S. have increased 33.2% over the past five years, according to the U.S Census Bureau. While consumers have continued to be priced out and defer their homebuying plans, the number of new household formations has continued to grow (up 1.7 million between 2022 and 2023), driven by Generation Z and Millennials as well as increasing immigrant populations throughout the U.S., according to a report from the Joint Center for Housing Studies of Harvard University.⁶ An increase in household formations and falling existing home inventory (down 35.3% over the past five years as of March 2024) have increased demand for newly constructed single-family homes and rental units. As a result, Capstone anticipates sector growth to recover in the long-term, particularly as interest rate reductions are realized and home buying becomes more attainable for consumers as inventory levels rise. A recovery in residential construction and strong growth in the Public Infrastructure and Manufacturing end markets are expected to further catalyze Building Products M&A in the long-term.

Private Equity Accelerates Building Products M&A Activity, Driven by Long-Term Market Outlook

Building Products M&A activity has accelerated in YTD 2024, up 31.1% YOY with 232 transactions announced or closed. In alignment with previous years, strategic buyers have continued to comprise the majority (58.2%) of sector deal activity to-date. However, the proportion of sector M&A stemming from strategic buyers has decelerated 17.6% YOY as increased activity from financial buyers in 2024 has heightened competition between both buyer groups. Notably, financial buyers have comprised 41.8% of sector deals to-date, up from 29.4% in the prior year period. The increase has stemmed from a 137.5% YOY rise in deal volume from private equity add-on deals, which have jumped from 32 transactions in YTD 2023 to 76 in YTD 2024. Compared to YTD 2023, sponsor-backed buyers have surpassed public strategics as the sector’s second-largest buyer group to-date to make up 32.8% of sector deals, only trailing private strategics (38.8%).

Sector acquirers, particularly financial buyers, have accelerated deal activity to-date in an effort to bolster regional growth strategies and expand product portfolios and service offerings. Sponsors have demonstrated an appetite in the space despite recent volatility, pursuing targets with healthy backlogs and long-term growth prospects in the Residential and Commercial Construction markets. Notably, middle market private investment firm Monomoy Capital Partners acquired Southern Exteriors, a manufacturer and installation provider of both residential and commercial exterior building products, for an undisclosed sum in May. Monomoy cited the nationwide undersupply of housing and population migrations to the U.S. South as motivation for the acquisition. “Southern Exteriors presents an attractive opportunity to expand upon our track record in building products distribution and installation while supporting a fantastic business during its next phase of growth. Aaron and his team have established Southern Exteriors as a differentiated player in the highly fragmented exterior building products installation landscape,” Monomoy Managing Director, Lee Mlotek, noted in a press release.⁷ Sponsors in the space are expected to continue to yield significant levels of M&A volume, especially if interest rate cuts materialize and the Debt market opens up for transaction financing.

Sector participants’ ability to showcase strong backlogs, coupled with heightened competition from the private equity buyer universe, has spurred elevated deal valuations to-date. Of note, the average purchase price in the sector’s middle market (less than $500 million enterprise value) has risen 53.6% YOY from $114.8 million in YTD 2023 to $176.3 million in YTD 2024. Capstone anticipates buyer competition and valuations to continue accelerating in the sector, providing sellers looking for an exit with ample options and increased bargaining power during deal negotiations.

Private equity is driving M&A sector growth in the form of new platforms and tuck-in acquisitions. Interest rate cuts are expected to fuel further sector M&A activity, once realized.

Darin GoodHead of Building Products & Construction Services, Managing Director, Capstone Partners

Home Depot Targets Residential Professional End Market with Acquisition of SRS Distribution

Inflationary pressures and elevated interest rates have dampened consumers’ appetite for do-it-yourself (DIY) home renovation projects. Sector players serving DIY customers, including Home Depot (NYSE:HD), have increasingly pursued acquisitions in the Professional Residential Construction end market to diversify revenue streams and reconcile financial losses. In Q1 2024, home improvement retailer Home Depot generated $36.4 billion in revenue, down 2.3% compared to Q1 2023, according to its Q1 2024 earnings release.⁸ The company attributed the YOY revenue decline, as well as a broad slowdown in revenue growth at the company following the COVID-19 pandemic, to consumers shifting consumption away from goods towards services and their decreased budgets for DIY and home renovation projects. In an effort to combat the deceleration in consumer consumption at Home Depot stores, the company acquired SRS Distribution, a residential trade distributor serving professional roofers, landscapers, and pool contractors for $18.3 billion, equivalent to 1.8x EV/Revenue and 16.6x EV/EBITDA (June). After opening four new distribution centers in March, the acquisition of SRS distribution has accelerated Home Depot’s strategic initiatives focused on driving revenue growth by increasing its wallet share with residential professional customers, according to a press release.⁹ SRS expands Home Depot’s Residential Professional ecosystem with more than 760 branch locations across 47 states, more than 2,500 sales professionals, and a delivery fleet exceeding 4,000 trucks, according to a press release.¹⁰ Additionally, the deal builds upon a series of other recent acquisitions from Home Depot targeting residential professionals: International Designs Group (November 2023, undisclosed), HD Supply (November 2020, $8 billion, 1.3x EV/Revenue, 8.8x EV/EBITDA), and Compact Power Equipment Center (July 2017, $265 million).

"SRS has built a robust and successful platform that will accelerate our growth with the residential professional customer while presenting future opportunities with the specialty trade pro. SRS's branch network, coupled with The Home Depot's 2,000+ U.S. stores and distribution centers, comprehensive product offerings, and extensive pro brands, provides the residential pro customer with more fulfillment and service options than ever before,” noted Ted Decker, Home Depot CEO, in the press release.

With roughly half of its sales already stemming from residential professional customers, the acquisition of SRS has increased Home Depot’s total addressable market by $50 billion to a total of $1 trillion, according to an earnings call.¹¹ In fiscal year (FY) 2023, SRS generated approximately $10 billion in revenue with roughly $1.1 billion in adjusted EBITDA. This, combined with Home Depot’s FY 2023 ~$76.3 billion in sales from residential professional customers and $57 billion in sales stemming from Building Materials’ Products, has well-positioned Home Depot’s market entry into the broader Building Products sector beyond retail operations, according to its 2023 annual earnings release.¹² Capstone anticipates that a recovery in residential construction and future interest rate cuts will continue to support Home Depot’s wallet share growth with residential professional customers and its ability to compete with other direct-to-contractor players. Additional notable Building Products M&A transactions through YTD 2024 are highlighted below.

• MiddleGround Capital Acquires L.S. Starrett (March 2024, $130.4 Million, 4.0x EV/EBITDA) - In March, MiddleGround Capital, a private equity firm specializing in buyouts and lower middle market investments, acquired L.S. Starrett (NYSE:SCX) for an enterprise value of $130.4 million, equivalent to 4.0x EV/EBITDA and 0.5x EV/Revenue. L.S. Starrett manufactures and sells industrial, professional, and consumer measuring and cutting tools, along with related products. At closing, L.S. Starrett has been removed from the New York Stock Exchange and transitioned into a privately held company in May. MiddleGround expects its backing to enable L.S. Starrett to expand its product range and market scale.

“Starrett’s expertise and long history as a leader in the metrology and cutting tools markets align perfectly with MiddleGround’s investment strategy and operational experience. Most of MiddleGround’s Operations team has utilized Starrett products in their careers, and we look forward to furthering the company’s strong brand recognition as a leader benefiting from key trends including advanced manufacturing and reshoring,” noted MiddleGround Partner Justin W. Steil, in a press release.¹³

• Owens Corning Acquires Masonite International (February 2024, $4.3 Billion, 8.5x EV/EBITDA) – Owens Corning (NYSE:OC), a manufacturer and seller of building and construction materials, acquired Masonite International (NYSE:DOOR) for an enterprise value of $4.3 billion, equivalent to 8.5x EV/EBITDA and 1.5x EV/Revenue (February). Masonite designs, manufactures, markets, and distributes interior and exterior doors and door systems. The deal bolsters Owens Corning's Doors business unit via complementary product offerings and creates a scalable growth platform leveraging a $27 billion addressable market, according to a press release.¹⁴ Furthermore, the deal is expected to generate $125 million in run-rate cost synergies.

“The completion of this acquisition represents the start of an exciting next chapter that allows us to leverage our proven commercial, operational, and innovation capabilities to increase our offering of highly valued branded building materials for our customers. We are excited about expanding into this new growth platform and for the opportunities ahead,” said Owens Corning CEO, Brian Chambers, in the press release.

• Myers Industries Acquires Signature Systems (January 2024, $344.6 Million) – In January, Myers Industries (NYSE: MYE), an Ohio-based manufacturer and distributor of industrial products, acquired Signature Systems for an enterprise value of $344.6 million, equivalent to 3.1x EV/Revenue. Signature Systems is a leading manufacturer and distributor of industrial composite matting, sports flooring products, turf protection systems, temporary event floors, and temporary carpets and fencing. With Signature Systems well-positioned to benefit from increased infrastructure investments within growing end markets, Myers plans to leverage Signature Systems and its complementary products as a long-term growth platform.

"The addition of Signature Systems immediately strengthens our profitability and cash flow profile, providing a solid foundation for Myers Industries to achieve our ambitious Horizon 1 goals of reaching one billion dollars in revenue with a 15% EBITDA margin," said Mike McGaugh, CEO of Myers, in a press release.¹⁵ Myers amended its original loan agreement used to fund the deal to keep a $250 million revolving credit facility and added a $400 million five-year senior secured term Loan A, according to a press release.¹⁶ The updated loan agreement bolsters Myers’ liquidity profile and ability to fund future acquisitions.

To discuss the implications of long-term sector trends, provide an update on your business, or learn about Capstone's wide range of advisory services and Building Products M&A knowledge, please contact us.

Izzy Jack, Associate, was the lead Market Intelligence contributor to this article.

Endnotes

1. Federal Reserve Bank of St. Louis, “Total Construction Spending: Total Construction in the United States,” https://fred.stlouisfed.org/series/TTLCONS, accessed July 27, 2024.

2. U.S. Census Bureau, “Monthly Construction Spending, May 2024,” https://www.census.gov/construction/c30/current/index.html, accessed July 27, 2024.

3. U.S. Census Bureau, “Monthly New Residential Construction, June 2024,” https://www.census.gov/construction/nrc/pdf/newresconst.pdf, accessed July 27, 2024.

4. Federal Reserve Bank of St. Louis, “30-Year Fixed Rate Mortgage Average in the United States,” https://fred.stlouisfed.org/series/MORTGAGE30US, accessed July 27, 2024.

5. Associated Builders and Contractors, “ABC’s Construction Backlog Indicator Inched Higher in June, Contractors Remain Confident,” https://www.abc.org/News-Media/News-Releases/abcs-construction-backlog-indicator-inched-higher-in-june-contractors-remain-confident, accessed July 27, 2024.

6. Joint Center for Housing Studies of Harvard University, “The State of the Nation’s Housing 2024,” https://www.jchs.harvard.edu/sites/default/files/reports/files/Harvard_JCHS_The_State_of_the_Nations_Housing_2024.pdf, accessed July 27, 2024.

7. Monomoy Capital Partners, “Monomoy Forms Partnership with Leading Residential Exterior Services Platform Southern Exteriors,” https://www.mcpfunds.com/news/monomoy-forms-partnership-with-leading-residential-exterior-services-platform-southern-exteriors/, accessed August 6, 2024.

8. Home Depot, “The Home Depot Announces First Quarter Fiscal 2024 Results; Reaffirms Fiscal 2024 Guidance,” https://ir.homedepot.com/news-releases/2024/05-14-2024-110058012, accessed July 27, 2024.

9. Home Depot, “The Home Depot Expands Pro Ecosystem with Four New Distribution Centers Designed to Bring Convenience and Reliability to Pro Customers,” https://ir.homedepot.com/news-releases/2024/03-14-2024-120334266, accessed July 27, 2024.

10. Home Depot, “The Home Depot Announces Agreement to Acquire SRS Distribution, a Leading Specialty Trade Distributor Across Multiple Verticals; Expands Offering and Capabilities for Pro Customers; Increases Total Addressable Pro Market by Approximately $50 Billion,” https://ir.homedepot.com/news-releases/2024/03-28-2024-100102814, accessed July 27, 2024.

11. Home Depot, “The Home Depot to Acquire SRS Distribution - Conference Call,” https://event.choruscall.com/mediaframe/webcast.html?webcastid=6LCfQUc7, accessed August 6, 2024.

12. Home Depot, “Annual Report ‘23,” https://ir.homedepot.com/~/media/Files/H/HomeDepot-IR/2024/_2023_HD%20Annual%20Report%20-%20Combined%20IRsite_VF.pdf, accessed July 27, 2024.

13. MiddleGround Capital, “Middleground Completes the L.S. Starrett Company Transaction,” https://middleground.com/news/middleground-completes-the-l-s-starrett-company-transaction/, accessed July 27, 2024.

14. Owens Corning, “Owens Corning Completes Acquisition of Masonite, Strengthening Leadership in Building and Construction Materials,” https://investor.owenscorning.com/investors/stock-performance-and-earnings/press-releases/press-release-details/2024/Owens-Corning-Completes-Acquisition-of-Masonite-Strengthening-Leadership-in-Building-and-Construction-Materials/default.aspx, accessed July 27, 2024.

15. Myers Industries, “Myers Industries Announces Acquisition of Signature Systems,” https://investor.myersindustries.com/news/press-release-details/2024/Myers-Industries-Announces-Acquisition-of-Signature-Systems/default.aspx, accessed July 27, 2024.

16. Myers Industries, “Myers Industries Completes Acquisition of Signature Systems,” https://investor.myersindustries.com/news/press-release-details/2024/Myers-Industries-Completes-Acquisition-of-Signature-Systems/default.aspx, accessed July 27, 2024.