Building Products M&A Volume Remains Robust Despite Labor Shortages and Supply Chain Delays
Continued growth in public and private construction spending has led to robust levels of Building products merger and acquisition (M&A) activity in 2022. Notably, the Manufacturing, Commercial, and Lodging segments recorded strong year-over-year (YOY) construction spending growth in December 2022, expanding 42.6%, 22.7%, and 36.2%, respectfully, according to the U.S. Census Bureau.1 Although the sector has been plagued by supply chain issues and labor shortages, Building Products demand remained strong in 2022, evidenced by construction backlogs growing one month YOY to 9.2 months as of December, according to Associated Builders and Contractors (ABC).2 Federal incentives and robust highway and street spending have fueled heightened demand in the Commercial & Institutional and Infrastructure segments, which recorded YOY backlog increases of 0.9 and 2.7 months, respectively, according to ABC. Elevated construction backlogs are expected to support revenue growth in the near term and help insulate the sector in the case of a recession. In addition, sector optimism has been showcased by an increased level of participation in sector conventions and events. Of note, the annual Design and Construction Week (DCW) registered record attendance levels, attracting over 200,000 housing and design professional from around the world, according to the National Association of Home Builders (NAHB).3
Along with heightened backlogs, future sector stability will also be buoyed by commercial investments and financial backing by the U.S. government. Most notably, the Infrastructure Investment and Jobs Act (IIJA) plans to provide $110 billion in road and bridge refurbishments, according to the White House.4 In addition, the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act introduced a 25% tax credit for domestic investments in semiconductor manufacturing which has contributed to a 116% YOY increase in the number of new manufacturing facilities as of August 2022, according to the White House.5 Of note, Samsung (KRX:005930) announced in July 2021 that it will invest $200 billion in 11 manufacturing plants, starting with a $17 billion silicon chip plant near Austin, Texas, according to Nikkei Asia and Bloomberg.6, 7 Along with Samsung, Taiwan Semiconductor Manufacturing Company (TSMC) (NYSE:TSM) laid out plans to spend $40 billion on two new chip plants in Arizona to expand manufacturing capabilities and take advantage of chip shortages in the Technology industry (December 2022). Building Products sector participants are well-positioned to capitalize on the influx of funding for these and similar large scale manufacturing projects.
Strong Building Products M&A Leads To Sector Optimism
While demand remains high, inflation and a slowdown in construction financing have impacted the speed of project completion for many sector players, with 84% of construction and development companies surveyed reporting construction delays, according to the National Multifamily Housing Council (NMHC).8 Notably, the cost of electrical components, exterior finishes & roofing, and appliances have increased 13%, 9%, and 9%, respectively, according to NMHC.9 In the Residential Building segment, rising interest rates have started to deter housing starts and purchases, evidenced by private housing starts declining 21.8% YOY in December 2022, according to the U.S. Census Bureau.10 Additionally, the Construction industry currently has 440,000 job openings that have bottlenecked projects, with the IIJA adding an estimated 300,000 new jobs per year into the early 2030’s, according to McKinsey & Company.11 Through inorganic growth, strategic buyers have an opportunity to consolidate Building Products firms to increase manufacturing and distribution capabilities. Companies in the sector can utilize acquisitions to capitalize on high backlogs and increased raw materials prices to maximize revenues and reduce customer wait times.
The Building Products industry remains strong and due to numerous demand drivers, including elevated backlogs and increased federal funding, continues to outperform many other industry segments.
M&A Activity Remains Elevated Despite an Uncertain Economic Environment
M&A volume in the Building Products sector remained elevated in 2022, with 286 transactions announced or completed, compared to 296 transactions in 2021. The Building Products sector has been resilient to market instability with transaction volume down a modest 3.3% YOY compared to a 15.9% decline in total middle market M&A volume during the same period.
The majority of sector transactions (65.4%) were completed by strategics in 2022 as private and public buyers in the sector have looked to consolidate to meet demand. Strategic buyers have also focused on shoring up marketplaces by acquiring companies specializing in products that have been affected by COVID-19, including heating, ventilation, and air conditioning (HVAC) systems, electrical components, and lumber supplies. Notably, BlueLinx (NYSE:BXC) acquired Vandermeer Forest Products, a leading distributor of lumber and engineered wood to Washington, Oregon, Alaska, Idaho, Montana, and Hawaii, and select Canadian provinces for an enterprise value of $67 million, equivalent to 3.5x EV/EBITDA (October 2022). The addition of Vandermeer expands BlueLinx’s geographic distribution capabilities to include 50 states and select locations in Canada, according to a press release.12 “This acquisition is well-aligned to our specialty product growth strategy, gives us a meaningful growth platform in the Pacific Northwest, a stated strategic priority, and is consistent with our disciplined approach to capital allocation,” said BlueLinx President and CEO Dwight Gibson, in the press release. The transaction highlights the trend of strategics acquiring manufacturers and distributors that can immediately increase production capabilities and add scale.
Private equity firms increased their presence in the space, accounting for 34.6% of transactions in 2022, with total sector sponsor deal volume rising 8.8% YOY. Private equity investments in the Building Products sector have been fueled by robust projections for future growth and strong backlogs. KPS Capital Partners, a private equity firm based in New York, acquired Oldcastle BuildingEnvelope for an enterprise value of $3.8 billion in February 2022. Oldcastle BuildingEnvelope focuses on the production and distribution of a variety of building products including entrances, windows, and curtain walls. The transaction represents KPS’s first acquisition in the Building Products sector, highlighting private equity’s interest in creating platform businesses in the space.
M&A valuations in 2022 dropped slightly YOY, with an average sector purchase multiple of 9.1x EV/EBITDA, compared to the 2021 average of 10.2x EV/EBITDA. Strong M&A multiples in 2021 were primarily driven by strategic buyers consolidating to alleviate supply chain challenges and labor shortages. Premium multiples in 2022 continued to be awarded to target companies that have displayed a proven ability to provide increased production, timely distribution, and enhanced construction services capabilities.
Middle market (under $500 million in enterprise value) sector M&A multiples have remained strong, standing at 9.9x EV/EBITDA over the past three years, outpacing the broader Building Products and Construction Services industry average of 8.1x EV/EBITDA. M&A multiples have also outperformed public company sector multiples, averaging 7.6X EV/EBITDA over the last twelve months (LTM). Strong valuations in the sector have been upheld by elevated backlogs, heightened product demand, and increased federal funding.
Strategic Companies Maximize Capabilities through Distribution and Manufacturing Acquisitions
Strategic buyers have had a unique opportunity to build out production and distribution capabilities to lessen wait times. Many have done so by making large acquisitions to grow inorganically and ensure capabilities continue to scale.
- Fortune Brands Innovations to Acquire Emtek and Schaub Door and Cabinet Hardware (December 2022, $800 Million) - Fortune Brands Innovations (NYSE:FBIN) announced its acquisition of Emtek and Shuab Door and Cabinet Hardware from ASSA ABLOY (OCTPK:ASAZF) for an enterprise value of $800 million, equivalent to 2.3x EV/Revenue (December). Emtek and Shuab specialize in the manufacturing and distribution of premium household finishing products including cabinet hardware, door fittings, and bathroom fixtures. Fortune Brands Innovations has a broad product line that includes products ranging from bathroom and kitchen faucets to home security and lock offerings. The acquisition of Emtek and Shuab is expected to increase Fortune Brands’ building products capabilities to provide quality finishes to its customers and retailers.
“Emtek and Schaub allow us to enter a branded, growing and highly profitable category in a leadership position, where we can accelerate innovation and leverage our channel and consumer insights to create significant value over time. This transaction is consistent with Fortune Brands’ disciplined approach to value-creating acquisitions,” said Fortune Brands’ CEO Nicholas Fink, in a press release.13
- Interfor Corporation Acquires Chaleur Forest Products (October 2022, $238.3 Million) - Interfor Corporation (TSX:IFP), a leading premium lumber provider, acquired Chaleur Forest Products for an enterprise value of $238.3 million (October). Chaleur Forest Products focuses on providing lumber products to manufacturers, such as fences, flooring, and bed frames. The transaction is positioned to broaden Interfor’s geographic reach and increase the company's total lumber output capabilities. "This acquisition is consistent with Interfor’s growth-focused strategy as a pure-play lumber producer and builds upon our recent expansion into Eastern Canada with further geographic diversity. New Brunswick has a secure, high quality and competitive log supply, a supportive investment environment and proximity to key eastern markets,” said Interfor President & CEO, Ian Fillinger, in a press release.14
- Boise Cascade Wood Products Acquires Coastal Plywood Company (June 2022, $512 Million) – Boise Cascade (NYSE:BCC) acquired Coastal Plywood for an enterprise value of $512 million (June), equivalent to ~10.2x EV/EBITDA. Coastal Plywood manufactures and distributes premium lumber products including plywood, fencing, and treated wood. The acquisition is expected to drastically increase Boise Cascade’s ability to distribute its engineered wood products to its customers. Included in the deal is Costal Plywood’s two distribution locations in Havana, Florida and Chapman, Alabama.
"This acquisition incrementally expands our veneer capacity in support of our customers. Near term, it provides us the ability to optimize our existing engineered wood products (EWP) asset base. Longer term, we are excited to fully integrate this strategic venture and we intend to invest $50 million into our Southeast operations over a three-year period to further our EWP production capacity,” said Boise Cascade CEO, Nate Jorgensen, in a press release.15
To discuss sector M&A activity, provide an update on your business, or learn about Capstone's wide range of advisory services and Building Products sector knowledge, please contact us.
U.S. Census Bureau, “Monthly Construction Spending, December 2022,” https://www.census.gov/construction/c30/pdf/release.pdf, February 6, 2023.
Associated Builders and Contractors, “ABC’s Construction Backlog Indicator Flat in December at Highest Level Since Q2 2019,” https://www.abc.org/News-Media/News-Releases/entryid/19740/abcs-construction-backlog-indicator-flat-in-december-at-highest-level-since-q2-2019, accessed December 29, 2022.
National Association of Home Builders, “Design & Construction Week’s 10th Anniversary Attracts Record-Breaking Attendance,” Design & Construction Week’s 10th Anniversary Attracts Record-Breaking Attendance - NAHB, accessed February 13, 2023.
The White House, “Bipartisan Infrastructure Investment and Jobs Act,” UPDATED FACT SHEET: Bipartisan Infrastructure Investment and Jobs Act | The White House, accessed January 12, 2023.
The White House, “ CHIPS and Science Act Will Lower Costs, Create Jobs, Strengthen Supply Chains, and Counter China,” https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/09/fact-sheet-chips-and-science-act-will-lower-costs-create-jobs-strengthen-supply-chains-and-counter-china/, accessed December 17, 2022.
Nikkei Asia, “Chipping in: How U.S. states woo the likes of TSMC and Samsung,” https://asia.nikkei.com/Business/Business-Spotlight/Chipping-in-How-U.S.-states-woo-the-likes-of-TSMC-and-Samsung, accessed January 6, 2023.
Bloomberg, “Samsung Eyes $200 Billion Expansion of Chip Plants in Texas,” https://www.bloomberg.com/news/articles/2022-07-21/samsung-eyes-sweeping-expansion-of-chip-facilities-in-texas, accessed January 23, 2023.
National Multifamily Housing Council, “Construction Delays and High Costs Persist, but Conditions May Begin to Improve,” https://www.nmhc.org/news/press-release/2022/construction-delays-and-high-costs-persist-but-conditions-may-begin-to-improve/, accessed January 5, 2023.
National Multifamily Housing Council, “Quarterly Survey of Apartment Construction & Development Activity (December 2022),” https://www.nmhc.org/research-insight/nmhc-construction-survey/quarterly-survey-of-apartment-construction-development-activity-december-2022/, accessed January 5, 2023.
The United States Census Bureau, “Monthly New Residential Construction, November 2022,” https://www.census.gov/construction/nrc/pdf/newresconst.pdf, accessed December 27, 2022.
McKinsey & Company, “Will a labor crunch derail plans to upgrade US infrastructure?,” https://www.mckinsey.com/industries/public-and-social-sector/our-insights/will-a-labor-crunch-derail-plans-to-upgrade-us-infrastructure, accessed January 12, 2022.
BlueLinx, “BlueLinx Acquires Vandermeer Forest Products,” BlueLinx Holdings Inc. - BlueLinx Acquires Vandermeer Forest Products (bluelinxco.com), accessed January 6, 2023.
Fortune Brands, “Fortune Brands Announces Agreement to Acquire Emtek and Schaub Premium Residential Hardware Brands and the U.S. and Canadian Yale and August Residential Smart Lock Brands from ASSA ABLOY,” Fortune Brands Announces Agreement to Acquire Emtek and Schaub Premium Residential Hardware Brands and the U.S. and Canadian Yale and August Residential Smart Lock Brands from ASSA ABLOY - Fortune Brands Innovations, Inc. (fbin.com), accessed January 16, 2023.
Interfor, “Interfor Completes Acquisition of Chaleur Forest Products and Announces Additional Long Term Debt Financing https://interfor.com/wp-content/uploads/2022/11/Interfor-Completes-Acquisition-of-Chaleur-Forest-Products-and-Announces-Additional-Long-Term-Debt-Financing.pdf, accessed January 16, 2023.
Boise Cascade, “Boise Cascade Reaches Agreement to Acquire Coastal Plywood Operations,” https://www.bc.com/boise-cascade-reaches-agreement-to-acquire-coastal-plywood-operations/, accessed January 18, 2023.
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