M&A Market Poised to Heat Up in 2024
Owners and investors wait for the “spark” that will reignite M&A activity
The building products market continues to face headwinds as owners and investors wait for the “spark” that will reignite M&A activity. High mortgage rates and home price affordability have weighed heavily on buyer and seller behavior in the sector since Q3 2023. Pressure is building, and we expect the M&A market to heat up as we get deeper into 2023 and look ahead to 2024.
Resiliency of housing demand
Critical to the housing equation is demand for which there is no shortage. To satisfy what has been characterized as “unprecedented demand,” homebuilders are turning to options such as reduced footprints, smaller lots and rate buydowns, recognizing the need for more affordable entry-level homes to aid in the housing crisis. “Buyers should expect that over the next 12 to 24 months, there will be a notable increase in the number of entry-level homes available,” says Ali Wolf, chief economist of building consultancy, Zonda, in an interview with realtor.com. The Wall Street Journal reported that the share of new homes sold and priced under $300,000 rose to 17% in May, the highest level since December 2021. PulteGroup CEO Ryan Marshall told analysts in the company’s Q2 2023 call, “As data suggests, some first-time buyers are opting to go with less square footage or fewer options and upgrades as buyers need to purchase a home in today’s dynamic market environment.”
Despite elevated mortgage rates, new house demand is proving to be resilient. Builder sentiment rose to 50 in May, marking a 10-month high and the first midpoint reading for the index since July 2022. Housing starts also trended positively in May, registering a solid 21.7% gain to reach a seasonally adjusted annual rate (SAAR) of 1.63 million units—an 11-month high. Driving the demand for new construction is the lack of existing home inventory. “The housing market continues to show signs of optimism with new home construction activity partially offsetting the impact of the lock-in effect on existing home sales,” says Jeffrey Jackson, CEO, PGT Innovations, commenting during the company’s Q2 2023 earnings call.
We remain optimistic that repair and remodeling demand will remain elevated, with less-discretionary renovations outpacing broader activity. While growth is projected to decelerate coming off the highs observed in 2021 and 2022, many homeowners are staying in place and reinvesting in their homes, mainly as mortgage rates are likely to remain elevated over the near term fueled by additional Fed rate hikes to combat inflation.
Strategic industry transactions
Despite the challenging environment, high-quality deals are getting done, with capital availability keeping buyers in the market. Strategic buyers continue to sit on large cash balances, and private equity has raised record amounts of uninvested capital looking to be put to work in high-quality assets. The healthy mix of strategic and financial buyers indicates a building pipeline and a deal market poised for a resurgence.
In July, Jeld-Wen Holding completed the sale of its Australasia window and door business to Platinum Equity, an operationally oriented private equity sponsor with significant experience in the building products industry. The business operates from 41 manufacturing locations across Australia, Malaysia and Indonesia.
PGT Innovations finalized the purchase of Eco Enterprises in June, acquiring the remaining 25% interest in the company. In addition to realizing revenue growth and margin expansion, PGTI added glass production capacity, furthering its vertical integration strategy. Eco Enterprises manufactures aluminum and impact-resistant windows and doors, primarily serving South Florida.
In May, Pella Corp. expanded into South Florida with Lawson Industries. With the acquisition, Pella will increase its capabilities in impact-resistant aluminum windows and doors.
Valuation metrics are improving. Public company valuations have trended up over the past three quarters, with Q2 2023 median EBITDA multiples for the Brown Gibbons Lang & Company Window and Door Composite Index up 11% from the year-ago period. As companies continue to weather short-term headwinds, BGL remains optimistic about the long-term demand profile of the building products market and believes the fundamental demand/supply imbalance in the market will result in a prolonged period of new construction growth.
