If 2006 was the year of the megadeal, 2007 is shaping up as the year of the strategic buy.
Last year saw the creation of Pro-Build Holdings, the biggest pro dealer in the country, as well as the rapid buildup of The Home Depot's HD Supply division, whose LBM operations alone put it third on this year's PROSALES 100. Now contrast that with this year's announced deals (see chart). Through July, the only major acquisition was Beacon Roofing's purchase of North Coast Commercial Roofing Systems, at $253 million in sales the Midwest's largest distributor of commercial roofing products. August did see a blockbuster with the $8.5 billion transaction that handed HD Supply over to three private equity firms, but that deal represented The Home Depot's retreat from the serious pro market.
As with Beacon, many of the deals that have been done don't involve takeovers of lumberyards but rather feature truss manufacturers, millwork specialists and similar value-added businesses. "Stock, Pro-Build and the others are looking to supply the whole house-bundle up their services," said Rob Slee, managing director of the Charlotte, N.C.-based investment banking firm Robertson & Foley.
Phil Whitcomb, a managing director at JMP Securities in San Francisco, said private equity firms that put together huge, highly leveraged deals are less interested in the construction supplies industry because they can't securitize their debt like they once did. But people who invest in LBM strategically are still shopping, he said.
"The strategics aren't scared away from LBM," he said. "They know the market is coming back."
Many of the bigger operations are being acquired as much for geographical as for performance reasons. Pro-Build revealed this in April when, two years after it bought 13 yards from Parker Lumber located in San Antonio as well as lightly populated central and southeast Texas, it sold back 10 of those yards to Parker and kept two located in San Antonio plus one in Texas' Hill Country. The other locations "don't fit into our core strategy of serving the larger, faster-growing areas in Texas," Hylbert said.
As for one-yard operations, Slee says, "single locations are really tough to sell" because one dealership in a community large enough to interest a major out-of-town buyer usually isn't enough to deliver the market share desired. These usually end up being purchased by relatively local yards, such as when S.W. Collins of Caribou, Maine, acquired the Almon H. Fogg Co. in Houlton, the county seat.
That purchase Down East involved a dealership whose owner was ready to retire, and it fed the notion that most purchases are at places where the current boss is nearing 60 and doesn't have any children who want to take over. But Slee said that isn't the case. Most of the companies his shop sells are being run by the kids, Slee says, but those younger folk want a life where they can draw a salary and go home at 6 p.m.
Whitcomb said soon-to-be retirees wanting to sell-what he calls "estate planning sales"-account for about 30%-40% of the deals he handles. Another 20%-30% involve a family-owned business that already has hired a manager, owns stock in the dealership, and is looking to inject more capital in as well as possibly give the manager an opportunity to take a stake in the business. The rest, he said, involve folks who started the business in their 30s and by their early 50s "are ready to go to the beach. ? They want to diversify their wealth." Such people often are willing to remain with the company a few years after the acquisition-often as part of deals in which the final payment to the seller kicks in years after the contract is signed and is contingent on the company's continued success.
While relatively dormant, the desire for dealmaking remains. Pro-Build Holdings of Englewood, Colo., No. 1 on the ProSales 100 and itself the creation of M&A deals less than two years ago, announced Aug. 23 that it was appointing George Finkenstaedt to the position of senior vice president of corporate development, where he'll focus on M&A deals. "M&A continues to be a key strategic initiative for Pro-Build moving forward," Pro-Build CEO Paul Hylbert said in the press release announcing Finkenstaedt's new duties.
–Craig Webb is editor of PROSALES.