Yorkville, Ill.–based pro dealer F.E. Wheaton has rarely had a problem with growth. In 2004, the company increased sales by 27.4 percent to $106 million from two locations, topping a 2003 increase of 11.9 percent and continuing an upward trend that saw modest sales growth of 6.5 percent and 6.8 percent in 2002 and 2001, respectively. But by 2005, company shareholders were becoming a bit hesitant about expending the capital it would require to take F.E. Wheaton “to the next level,” according to company president Jeff Brown. Aggravating the scenario was a Chicago metro market that has been inundated with the arrival of consolidating production builders along with large, acquisitive pro dealer chains on their heels looking for a piece of the action as they attempt to align with big builders and simultaneously pursue their own growth goals.
“Just given what was happening in the marketplace with consolidation at the dealer level, at the customer level, and at the supplier level, it made sense for us [to begin the process of selling the company],” says Brown. “We looked out over five years and made the conclusion that it was in the best interest of our employees and our customers to be aligned with a larger company that will have significant resources for us to grow the business in this rapidly consolidating market.”
F.E. Wheaton wasn't alone. Before the company announced its purchase by Redmond, Wash.–based Lanoga Corp. on Jan. 6, Elgin, Ill.–based pro dealer Seigle's had already been acquired by Raleigh, N.C.–based Stock Building Supply, which bought the $257.8 million dealer and its Michael Nicholas framing division on Nov. 2, 2005, a move that put Stock in direct competition with San Francisco–based BMHC's BMC Construction division, which had purchased Residential Carpentry, a $50 million Chicago framing contractor, on Jan. 27, 2005. Even while F.E. Wheaton was in the process of selling to Lanoga, Lanoga itself was acquired by Boston-based investment firm Fidelity Capital in a national move that pairs Lanoga with Fidelity's South Plainfield, N.J.–based pro dealer The Strober Organization.
Once a bastion of independent, industry-leading pro dealers, Chicago became in 2005 a conglomeration of large national suppliers with only several standout independents—including Buffalo Grove, Ill.–based Edward Hines Lumber and Aurora, Ill.–based Alexander Lumber—left to compete with the chains. And according to pros and analysts alike, markets across the country could be poised to follow the Chicago model in a wave of industry consolidation that most believe has yet to crest.
A Buyer's and Seller's Market “I definitely think we are in a new era,” says Nicholas V. Beare, managing director for building materials and home building at Dallas-based Stephens Inc., an investment banking firm with a focus on lumber and building material supply. Specifically, Beare points to a surging residential construction supply market that has smaller independents opting to sell and larger firms concurrently looking to add scale. “For the rest of 2006, you are going to continue to see infill among the big guys—I don't see that changing. The medium guys will be hunting for bolt-on value-add, and I think the small guy will still be looking to cash out.”
Stock Building Supply CEO Fenton Hord agrees. “Whenever you have a period of time where markets are strong for as long as they have been, I think it gives everyone confidence to invest in their businesses,” Hord says. “For those that are sellers, they probably have the thought ‘When is this going to come to an end, is this the peak, and should I sell out?' It's the convergence of those two things that is causing [the current wave of consolidation].”
In addition to providing an avenue for liquidating sweat equity while the market is at its peak, acquisitions by larger companies are providing independent dealers with growth avenues that most say were otherwise unattainable in the industry's current competitive atmosphere. Like F.E. Wheaton, Hammonton, N.J.–based independent pro dealer Universal Supply cited the capital clout to add new product lines and execute expansion plans from its current seven units into additional New Jersey markets when the company announced it had been acquired by Stock on Jan. 31.
According to Universal president Jeff Umosella, the combination of companies should provide synergies in inventory mix, market penetration, and technological development. “I think that is one of the things that made us interesting to Stock, to understand the technologies that we offer, and they'll be looking [to] us for support in helping to implement those systems in their different market districts,” Umosella says. In turn, Stock offers product and service expertise in lumber, trusses, trim, interior doors, and kitchens. “Those things have not traditionally been our primary products. We've always specialized in roofing, siding, and windows,” Umosella says. “So we think we can also penetrate deeper into existing markets with a whole materials package.”
For buyers, the current M&A market is providing opportunities to match up geographically with national production builders, add increased manufacturing and value-added service capabilities to their portfolio, and provide additional fill-in market share in regions where those companies have already developed a market presence. “We feel there are still great opportunities to continue to grow [through acquisition],” says Lanoga CEO Paul Hylbert, who will become a vice chairman of Pro-Build, a new pro dealer entity created under Fidelity Capital that will include the divisions of Lanoga and The Strober Organization. “The fact that we would actively pursue the acquisition of F.E. Wheaton during the time when we were in negotiations between Fidelity, Strober, and Lanoga exemplifies our attitude in that regard. I think Stock is growing fast, as is BMHC. I see all the larger companies, including Builders FirstSource, being involved in being acquisitive.”
Indeed, Builders FirstSource (BFS), which has not made a significant acquisition since a purchasing round in 2003 that saw the company pick up North Augusta, S.C.–based Adams Building Materials and Cashiers, N.C.–based Bond Builders Supply before taking itself public on June 22 of last year, has signaled its preparedness to be an M&A player over the course of the next 12 to 16 months. “There is nothing we are prepared to disclose at this time, but it does feel like the industry is about to enter another wave of consolidation and certainly we have the balance sheet to participate in that,” says BFS senior vice president of operations and COO Kevin O'Meara.