The housing market remains a bright spot in the U.S. economy this year after a similarly robust 2015. Housing construction is booming and U.S. construction spending reached its highest level in March in more than eight years, according to the New York Times.
Both the residential and commercial sides are making gains. Inventory is tight and, with demand exceeding supply, home prices are climbing and new home starts are on the rise. As a result, construction job numbers are up, and builder sentiment is positive, MarketWatch reports. With interest rates still low and fewer rate hikes expected than previously predicted, mortgage rates remain at historically low levels, adding to the positive construction environment.
This recent uptick in building has boosted sales of construction products, turning manufacturers of these products into attractive takeover targets for private equity firms and strategic buyers alike, according to The Middle Market. Our Q1 Manufacturing & Distribution M&A Outlook and Review notes that the while the general economy tends to ebb and flow in four- to seven-year cycles, the building products industry appears to be in year four of a 10-year cycle and deal flow in the sector is active.
Innovative Chemical Products—backed by Audax Private Equity—acquired adhesives maker Fomo Products in April for an undisclosed sum. Fomo manufactures adhesives, sealants and spray foam products, making it a natural fit for ICP, which makes coatings and adhesives for the construction, packaging and printing sectors. Also in April, Nautic Partners-backed IPS—a global manufacturer of adhesives, solvent cements and specialized plumbing products—purchased Integra Adhesives from management in its fifth acquisition since becoming a Nautic VII portfolio company in February 2015. And Z Capital Partners bought Twin-Star International, a designer and manufacturer of electric fireplaces, heaters and home furnishings.
Strategic investors have also closed a number of deals in the last year. Quanex Building Products paid $248 million for cabinetmaker Woodcraft Industries in November, while last August, Summit Materials bought gravel-pit operator LeGrand Johnson Construction, which will become part of Summit’s Kilgore Companies business in Utah. Door manufacturer Masonite International bought privately held USA Wood Door last October for $13 million and door-kit maker National Hickman for $82 million last August.
The Middle Market predicts that building products M&A will remain strong through 2016, as the prospect for a continued housing recovery remains strong. Private equity firms interested in middle market companies may continue to find opportunities in the building products sector and those entering now could be poised to enjoy even greater growth.
Sources: Forbes, Furniture World, MarketWatch, Mergers & Acquisitions, Modern Distribution Management, New York Times, NREI Online, The Wall Street Journal.
What’s Up Next for Manufacturing Investors
Strong appetite for M&A in the manufacturing sector has persisted following an active year of deals in 2015—industrial manufacturers announced a record-level transaction volume of $1.3 trillion in Q4 2015, according to commercial real estate services firm JLL. Several factors indicate that deal activity in the sector will remain steady, including the need for geographic expansion and strong demand in the housing market, reports Mergermarket. However, as we near the upcoming presidential election, investors will likely approach the space more cautiously due to uncertainties around the impact of future regulation on deals. In fact, investors are more optimistic in manufacturing industry deals over the long term than the short term. In Mergers & Acquisitions’ Mid-Market Pulse (MMP), survey respondents gave manufacturing deals a 12-month forward-looking sentiment score of 61.4, compared to the three-month sentiment score of 59.7. That said, consolidation in the building materials and construction sectors ramped up in May 2016, notes Modern Distribution Management, highlighting the large role that deals will continue to play in the building products sector for the foreseeable future.
This article originally appeared in BDO USA, LLP’s “Manufacturing & Distribution” newsletter (Summer 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com