An Open Window for Building Products M&A
The market continues to show resilience despite ongoing obstacles
The building products mergers and acquisitions market continues to see healthy deal flow despite current market uncertainty. As an advisor to window and door companies, we are keenly aware of current challenges in the housing market; most notably, materials and labor cost inflation, along with rising mortgage rates, which continue to have a tightening effect on affordability. Input costs have risen nearly 20 percent from a year ago. Mortgage rates have risen to their highest level in more than a decade.
Despite these obstacles, the market has shown resilience. Company performance has been strong. The vast majority of our clients are continuing to post solid performances for the first half of 2022. Many have growing backlogs, with several being sold out through the balance of 2022 and into 2023.
PGT Innovations delivered a record quarter, according to CEO Jeffrey Jackson in the company’s FQ1 2022 earnings call. Net sales increased 32 percent during the quarter, including organic growth of 17 percent (13 percent price and 4 percent volume), which Jackson attributed to the company’s regional brand strength. PGTI saw EBITDA margin expansion during the quarter, driven by pricing actions taken throughout 2021, Jackson indicated.
In its FQ1 2022 earnings call, Masonite reported 12 percent net sales growth for the quarter year-over-year, a 22 percent increase in adjusted EBITDA, and a 140-basis-point improvement in its adjusted EBITDA margin.
Jeld-Wen’s FQ1 2022 net revenues increased 7.2 percent, marking the seventh consecutive quarter of consolidated core revenue growth for the company, said CEO Gary Michel.
The building products market continues to see strong interest from both private equity and industry buyers and solid levels of M&A activity. Purchase price multiples for high-quality businesses remain attractive. The credit markets are liquid, and lenders are looking to deploy capital into acquisitions.
Notable recent transactions
Announced in February 2022, Clayton, Dubilier & Rice’s privatization of Cornerstone Building Brands was headline news in the window and door market during Q1 2022, with the $6.1 billion purchase price valuing the business at a 7.1x multiple of EBITDA at announcement. CD&R is acquiring the remaining 50.8 percent equity interest it does not already own in the transaction.
In April 2022, CRH plc completed the divestiture of Oldcastle BuildingEnvelope to KPS Capital Partners. The U.S.-based unit makes glass building products for windows, curtain walls and storefronts, among other applications. The $3.8 billion deal valued the business at 11.3x EBITDA.
2021 was a very active M&A year for industry buyers, some of which have been focusing their efforts on the integration of those activities in the recent quarters and are turning their attention to M&A.
PGTI cited continued growth from its October 2021 acquisition of Anlin Windows & Doors, which closed a record first quarter of 2022—the best quarter in the company’s history—and is “performing above our internal acquisition model estimates,” according to Jackson in PGTI’s FQ1 2022 earnings call. PGTI’s acquisition of Eco Window Systems in February 2021 furthered the company’s vertical integration strategy, doubling its glass manufacturing capacity and serving to shore up its supply chain. Acquisitive growth remains a key strategic pillar for the company. “Our balance sheet strength gives us the flexibility to effectively allocate capital as we look to continue to grow both organically and through strategic acquisitions,” Jackson commented. Jackson also highlighted a robust acquisition pipeline and said the company is evaluating a number of possible acquisitions.
“We are focused on accelerating our growth through market penetration, pursuing bolt-on acquisitions, and product innovation,” said CEO Rose Lee during Cornerstone Building Brands’ FQ3 2021 earnings call. Acquisitive CBB added Cascade Windows and Prime Window Systems to its portfolio in August and April 2021, respectively. Cascade Windows, acquired for $245 million in cash (1.53x Revenue) and Prime Window Systems for $95 million (1.57x Revenue), are intended to extend CBB’s market position in vinyl windows in the Western U.S.
Looking ahead
We are closely watching macroeconomic indicators as inflationary conditions have pressured not only building products companies, but many industrial businesses. Public companies have not been immune to the recent volatility and have seen stocks trade down with a corresponding contraction in EBITDA multiples.
Despite cost headwinds, industry participants express optimism around positive near-term demand trends. “We remain encouraged by the favorable underlying demand fundamentals across most of our primary end markets,” said Jeld-Wen’s Michel. Michel highlighted 13 percent core revenue growth in North America, driven by price increases and continued solid demand for products in both residential new construction and R&R activity. Strong end market demand fueled order growth in FQ1 2022, resulting in a year-over-year increase in backlog, “…our highest backlog since the start of the pandemic,” Michel commented.
“All signs point to continued strength for R&R and new construction based on fundamental demand drivers and favorable demographics,” said Nicholas Fink, CEO of Fortune Brands Home & Security, to analysts in the company’s FQ1 2022 earnings call. Fink characterized current demand levels as robust across its leading brands.
PGTI reports strong demand and is forecasting mid-single-digit volume growth across its key markets. In May 2022, the company announced a facility expansion at its Phoenix location in support of growing its Western Window Systems brand, which has experienced 30 percent year-over-year growth over the past two years, reported Jackson. Jackson attributes the strong performance to continuously increasing demand for the brand in the markets it serves.
The National Association of Home Builders is forecasting 4.4 percent growth in total housing starts for 2022 with single-family starts flat for the year. Total housing starts decreased 0.2 percent to 1.724 million units in April 2022, marking the third consecutive month of declines amid rising concerns over housing affordability. Single-family starts decreased 7.3 percent to 1.1 million units.
The remodeling market continues to exhibit strength, with robust growth predicted throughout 2022 and into early 2023. An April 2022 projection from the Joint Center for Housing Studies of Harvard University estimates spending on remodeling activity will approach $450 billion by the first quarter of 2023. The JCHS revised its forecast from January showing an easing of what it calls “red hot remodeling growth” into 2023; however, trends remain positive with projected growth rates solidly in the high double digits.
More deals on the horizon
We anticipate M&A activity to accelerate during the second half of 2022, particularly as private equity looks to spend surplus “dry powder,” and with even more interest and more aggressive M&A activity from strategic buyers as they shift resources from recent acquisition integration efforts and return to the hunt for new deals. Shareholder expectations for growth will also motivate some strategics to come off the sidelines and sharpen focus on M&A as an important lever for value creation.
