Building on Momentum

The mergers and acquisitions market has been hot, but how long can this positive momentum be sustained? We are gearing up for a busy second half of 2021, and here are some reasons why:

The U.S. economy is strengthening. Capital is abundant and interest rates are low. The housing market remains strong, despite some near-term challenges. First-quarter results point to healthy demand and financial performance. All of those are key demand drivers for business owners and investors. 

Strong capital markets environment 

• Major public equity indices rose to record highs during Q1 2021 and have sustained gains supported by positive news on the economy and vaccine deployment. The S&P 500 and DJIA realized returns of 13.6 percent and 14.25 percent, respectively, for the year-to-date period.  
• Public window and door manufacturers, including Jeld-Wen, Masonite, PGT Innovations, Fortune Brands Home & Security Inc. and Cornerstone Building Brands, continue to outperform the broader market, with a year-to-date return of 24.71 percent. The median EBITDA multiple for the window and door subsector of 9.0x in Q1 2021 is 43 percent above the Q1 2020 level. Cash balances top $2 billion. 
• More than $745 billion in private equity capital has been raised and needs to be deployed into new investments. Historically active investors in the window and door space, private equity sponsors continue to pursue growth platforms and tuck-in acquisitions for existing portfolio companies. 
• Credit markets are open for business, with average lower middle market leverage (total debt/EBITDA) of 4.0x for Q1 2021. (Private equity-sponsored M&A transactions with enterprise values of $10 million to $250 million.) Lenders are evaluating businesses through a post-COVID lens that prioritizes stability and resiliency more than ever before. Diversification, differentiation and supply chain/distribution are key areas receiving more attention in due diligence. Industries showing resiliency through COVID are garnering leverage multiples and pricing on par with, or in some cases, more attractive than pre-COVID levels. Heavily impacted industries continue to see a cautious approach from lenders. 

Valuations

Corporate transactions serve as barometers of healthy valuations. Closed in February 2021, PGT Innovations’ $108 million acquisition of Eco Window Systems valued the business at a 1.48x multiple of revenue. Fortune Brands Home & Security’s $660 million acquisition of Larson Manufacturing Co. in December 2020 valued the business at an 8.8x multiple of TTM EBITDA and a 1.69x multiple of revenue.

Lower middle market private equity transaction multiples (with enterprise values of $10 million to $250 million) have averaged 6.9x over the past 12 months, slightly lower than the 7.0x to 7.2x range that had characterized the market since 2017. Buyers continue to define a “quality premium” in valuations for above-average financial performance. Premiums of 30-plus percent were observed in H2 2020 and are still holding today, reported GF Data.

COVID-19 has impacted industries and company performance differently, and buyers are evaluating “COVID-adjusted” financial results typically with a look-back period of at least three years to derive normalized earnings over the period. Larger transaction size and EBITDA size (i.e., equates to larger scale) also factor into higher valuation premiums paid.

Mid-year outlook 

Overall deal volume is expected to remain strong, with these positive market dynamics providing the necessary supports. Middle market transaction (with enterprise values of $25 million to $500 million) volume is up 15 percent through May, and deal pipelines are growing. Transaction value is up 33 percent over the same period. The looming tax rate increase is expected to incite more sellers to close in 2021, which will have a significant impact on M&A activity. The proposed rate change would increase capital gain rates from 20 to 40 percent for any gain more than $1 million.

Recent deal activity in the window and door space is indicative of healthy buyer appetite:
In June, ENERGI Fenestration Solutions Ltd. divested its primary operations in three transactions:

• ENERGI Fenestration Solutions USA Operations, acquired by The Vision Group
• ENERGI Terrebonne Patio Door Division, acquired by Novatech Group
• ENERGI Laval Extrusions, acquired by Thermoplast Extrusions

The Industrials team of Brown Gibbons Lang & Company served as the exclusive financial advisor to ENERGI in the process.

Cornerstone Building Brands completed the acquisition of Denver-based vinyl window and door manufacturer Prime Window Systems (PWS) in May. The company expects the transaction will expand its reach in the residential new construction and repair and remodel markets in the Western U.S. PWS generated approximately $60 million in sales during 2020. Windows is the largest segment for Cornerstone, accounting for approximately 41 percent of sales and 33 percent of EBITDA in 2020. 

Also in May, Glenn Rieder acquired Palm City Millwork, which manufactures custom millwork products, including doors and windows for custom home builders serving the high-end residential market in South Florida.

In January, PGTI acquired a 75 percent ownership interest in Eco Window Systems, which manufactures and installs aluminum, impact-resistant windows and doors serving the South Florida region. PGTI, which also added glass manufacturing capabilities, expects the transaction will expand its presence in the Florida commercial market.