M&A Activity Shows No Signs of Slowing

Favorable market conditions in the residential building products industry are continuing with the pace of merger and acquisition activity showing no signs of slowing. Investor optimism hinges on secular strength in home construction and remodeling, coupled with buoyant capital markets and low interest rates, which provide a foundation for healthy buyer appetite and strong valuations. Multiple bidders are competing in auctions, which is driving up prices.  

Macro indicators point to near-term growth, echoed by industry participants which report strong business performance. Residential construction spending in September is 19 percent higher year-over-year, with single-family construction spending up more than 30 percent. Repair and remodeling spending is predicted to remain robust, with year-over-year growth reaching 9 percent in Q4 2021 and maintaining that pace into 2022. Supply chain and labor issues are holding back growth and contributing to cost headwinds.

The residential building products sector continued to see gains above the broader market with a year-to-date return of 34.51 percent, which compares to 24.67 percent and 17.91 percent for the S&P 500 and DJIA, respectively, as of Nov. 16, according to S&P Capital IQ, company filings and public data. Median EBITDA multiples of public residential building products companies have moderated from a high of 13.3x in the first quarter to average 12.8x in 2021, which is 10.3 percent above the 2020 average of 11.6x.  

Recent M&A Updates

Since our mid-year update, several deals in the window and door space have been announced, which include transactions by acquisitive strategics PGT Innovations (Anlin Window & Doors in October) and Cornerstone Building Brands (Cascade Windows in August).

PGT Innovations’ $126 million acquisition of Anlin valued the business at 8.5x EBITDA (pre-synergies) and 1.2x Revenue. Anlin (vinyl, repair and remodel (R&R)) complements Western Window Systems (aluminum, new construction), both businesses furthering PGTI’s western growth strategy. PGTI acquired Western Window Systems in 2018. The transaction marks PGTI’s third acquisition in 2021. In May, it acquired California-based installation contractor CRi, and in February, Eco Window Systems, both moves to bolster its position in the commercial market.

Cornerstone Building Brands completed the Cascade deal on the heels of Prime Window Systems, closed in May. Cascade expands Cornerstone’s manufacturing footprint in the west coast region adding six manufacturing locations. The supplier of energy-efficient vinyl windows and doors serves the residential new construction and R&R markets. “Cascade is an excellent strategic fit for our company and advances our strategy to grow in the large, deep residential windows market,” says CEO James Metcalf. The $245 million transaction valued the business at a 1.53x multiple of revenue. Windows is the largest segment for Cornerstone, accounting for approximately 42 percent of sales and 33 percent of EBITDA for the 12 months ended July 2021.

In June, Westlake Chemical Corporation completed the purchase of the North American Building Products operations of Boral Limited in a $2.15 billion all-cash transaction (~1.95x revenue). The businesses include roofing; siding, trim and shutters; decorative stone; and windows, supported by 29 manufacturing sites in the U.S. and Mexico. With the acquisition, Westlake will double its building products portfolio in North America, a market expected to see double-digit growth over the next three years, said CEO Albert Chao in the acquisition announcement. Boral formed the Boral North America division in 2017 with the acquisition of Headwaters, which it combined with Boral USA. 

Buyers are flush with capital. We expect M&A activity to maintain its momentum for the foreseeable future as investors look to put money to work in the accommodative lending environment.