The U.S. window and door industry experienced strong merger and acquisition activity in 2018. This activity reflects the continuation of a long-term trend in consolidation activity for manufacturers, distributors and upstream suppliers.
There have been 16 announced or completed transactions in the first 11 months of 2018, as compared to 14 transactions in all of 2017. One of the larger transactions was the simultaneous acquisitions of two of the largest window manufacturers, Ply Gem and Atrium Windows, by Clayton, Dubilier & Rice; the new Ply Gem then merged with NCI Building Systems.
The majority of transaction volume in the space, however, has occurred in the middle market, with transactions of note including the acquisition of Western Window Systems by PGT Innovations, and the sale by private equity firm Audax Group of industrial door manufacturer Senneca Holdings to the private equity firm Kohlberg & Co.
The broader U.S. building products industry has experienced multiple years of consolidation following the Great Recession. 2018 has continued that trend with 134 announced or completed transactions year-to-date through November 2018—a 14 percent growth rate in transaction count compared to all of 2017. Moreover, there has been over $14 billion in announced enterprise value—compared to $5 billion in 2017—as there were several significant M&A transactions of scale, including the $6.6 billion purchase of drywall manufacturer USG by Knauf.
In addition, middle market transactions remain robust as leverage availability, substantial levels of equity capital, competition among potential acquirers and a scarcity of high-quality assets provide a strong foundation for values.
Looking ahead
Going forward, continued growth in transaction count and purchase price multiples will depend on continued growth in construction activity, which has enjoyed several years of single-digit growth since the Great Recession. While recent macro indicators have demonstrated strong economic growth, construction activity in 2018 has been mixed. For instance, single-family starts are at the same level as last year while multi-family starts have shown nominal growth, albeit with large month-to-month variances.
Tight labor markets, low affordability, increased rental activity and higher interest rates have collectively had an impact on the pace of growth of new construction. Still, multiple years into the recovery, residential construction spending is below pre-recession levels. Construction activity will be supported by long-term demographic trends and household formations. While in the short term there may be a supply-side-created slowdown in construction activity, in the long term we see strong demand supporting industry growth for years to come.
Overall, continued consolidation in both the window and door vertical and in the broader building products industry is expected to continue into 2019, as construction activity is expected to support both large and middle market M&A transactions at levels consistent with 2018. There remains a number of privately owned and private equity owned assets that make good strategic sense for large manufacturers to buy to capture synergies. Private equity firms are also looking to invest in good businesses that will generate attractive investment returns.