L.A. Story: Steve Gardner, owner of L.A. Roofing in Los Angeles, says the wave of buyouts among smaller roofing companies has forced his firm to seek product niches to survive.
L.A. Story: Steve Gardner, owner of L.A. Roofing in Los Angeles, says the wave of buyouts among smaller roofing companies has forced his firm to seek product niches to survive.

L.A. Roofing is pretty typical of independent roofing distributors around the country. The Los Angeles-based company, which opened in 1982, has a single branch that stocks between $600,000 and $700,000 in inventory per month, and generates anywhere from $8 million and $12 million in annual sales to contractors across California, where it regularly bumps into industry giants such as ABC Supply and Beacon Roofing Supply.

“Right now, the ultimate goal is survival,” admits Steve Gardner, L.A. Roofing’s owner. That means looking for product niches, like single-ply materials, that the big distributors and big-box retailers are less interested in delivering.

Gardner acknowledges that large distributors have approached him about purchasing his company. For the moment, he’s not taking that bait, partly because of L.A. Roofing’s association with the buying co-op Nemeon.

Selling out to a consolidator has got to be on the minds of many independent owners when the industry’s leading roofing distributors have ambitious growth plans that seem achievable only by acquiring competitors. Peabody, Mass.-based Beacon—which since going public in 2004 through March 2013 bought 25 companies and opened 31 greenfield branches—wants to grow at a 15% to 25% annual clip, 10 to 15 percentage points of which are expected to come from acquisitions. “Our appetite has always been strong,” said Paul Isabella, Beacon’s CEO, during his company’s quarterly earnings call to analysts on Feb. 8.

“We’re definitely in growth mode,” agrees John McLaughlin, president of exterior products for East Rutherford, N.J.-based Allied Building Products, which has 146 branches in 25 states that distribute roofing, but whose coverage is noticeably light in the Midwest’s “hail belt”—hail being one of the main factors causing roof damage, which drives a sizable portion of many distributors’ businesses. “Our horseshoe is pointing in the wrong direction,” quips McLaughlin.

Private equity has been stoking this acquisition fervor. In late February, Boston-based Berkshire Partners acquired one of the more aggressive roofing consolidators, McKinney, Texas-based SRS Distribution. From that deal, SRS paid out $80 million to 90 employees who were shareholders. “So the liquidation was a homerun for them,” says Dan Tinker, SRS’s chief operating officer. And the bigger a distributor gets, he explains, the more control it has over its destiny and ability to retain employees.

Industry watchers are convinced that other investors are just waiting for an opening to buy into a roofing sector that is projected to deliver steady growth and healthy margins for at least the next five years, especially if it picks up some tailwinds from a recovering housing market. At least one analyst, Keith Hughes of SunTrust Robinson Humphries, wrote recently that the influx of private equity money into this sector increases the possibility of another super merger, a la ABC’s acquisition of the 129-branch Bradco Supply in 2010.

But as fewer players control more of the roofing sector, consolidators say the key to success will be balancing a decentralized business model with the economies of scale that bigness affords them. Of course, this sounds much like the plan that executives for the big lumberyards said they would use during their frenzied buying last decade, down to the oft-stated goal of having executives of acquired independents stay on board after the acquisition. That happened as recently as late March, when ABC bought the four-branch Lee Wholesale Supply in Michigan, whose management team joined the Beloit, Wis.-based giant. But at the same time, expansion-minded roofing distributors—especially those that also pin their growth on opening greenfield branches—realize the finding and keeping adept managers are inevitable challenges, and most of these companies have been searching for people to bulk up their own teams.

Still, this game plan sounds much like what executives for big lumberyard roll-ups espoused when they went on their buying frenzy a decade ago, and many of those companies ended up losing hundreds of millions of dollars as well as reorganizing under Chapter 11 bankruptcy-law protection. So what makes the roofing guys think they’ll be any different?

Company Profiles

/ HQ Address
Founded Ownership 2012 Revenue Branches Employees Vehicles
ABC Supply
/ Beloit, WI
1982 Private $4.6 billion 456 in 45 states 7,000 6,000
Beacon Roofing Supply
/ Peabody, MA
1928 Public $2.044 billion 229 in 38 states &
six Canadian provinces
1,272 1,565
Allied Building Products
/ East Rutherford, NJ
1950 Oldcastle Division of CRH Inc. $1.7 billion 186 in 25 states
(40 branches carry only interior products)
3,100+ 2,785
Roofing Supply Group, Dallas
1981 Clayton Dubilier & Rice $1.03 billion 63 in 25 states 1,000 300 (est.)
SRS Distribution, Dallas
2008 Berkshire Partners $785 million 90 in 30 states 1,060 400
Second-Tier Roofing Distributors
Gulfeagle Supply
/ Tampa, FL
1973 - $436 million
in 2011
60 in 16 states - -
SPEC Building Materials
/ Kansas City, MO
1973 - - 33 in 12 states - -
MacArthur Co.
/ St. Paul, MN
1913 - - 26 in 12 states - -