If the outlook for the year ahead is dependent—at least in part—on momentum from the previous year, then 2014 should be a good period for the market.
Last year closed with many companies benefiting from the strength of the economic recovery. The commercial segment outperformed the residential segment, surprising many pundits. On the residential side, the suspension of the National Association of Home Builders/First American Bank Improving Markets Index was evidence of an upswing, and tight lumber supplies and less-trepid lenders added spice to the recovery.
Prior to and during the downturn, a large number of acquisitions involved lumberyards and dealers carrying a broad line of products. In 2012 and 2013, this changed, with more acquisitions involving specialty dealers affecting a narrow range of products.
We analyzed 26 acquisitions that took place in the U.S. during 2012 and 2013, focusing on the underlying product areas of the acquired companies. We found that the majority of these transactions involved distributors that specialize in a narrow segment of products. Interestingly, security products was the most common product segment by number of deals, with four acquisitions in this segment over the last two years.
The next most common products—with three acquisitions each—were flooring, plumbing, and architectural metals distributors. There were two acquisitions each of insulation and tools distributors, while other distributors acquired included those with a focus on masonry, solar products, trusses, siding, cabinet doors, windows, HVAC products, and fasteners.
A notable acquisition during 2013 was Lowe’s purchase of 72 Orchard Supply Hardware locations out of bankruptcy for $205 million. Lowe’s cites debt as the largest contributing factor to Orchard’s financial difficulties. There was simply too much debt on the company to survive the downturn. But the management team was sound so Lowe’s opted to keep it in place after the transaction.
The mega-retailer bought the 72 locations intending to continue operating them under the Orchard Supply brand name. The reason: Although Lowe’s has a more recognizable name, the Orchard Supply brand is desired by local customers in the lucrative and recovering California market.
Taken together, the themes that emerge in these transactions could constitute an M&A trend for the pro dealer industry in 2014. They show an increased emphasis on dealers and distributors that specialize in a narrower range of products, and many of the acquisitions during 2013 were intended to benefit from geography, focusing on locales that expect to see the strongest recovery.
With lenders ready to do their part in making deals happen, it will be interesting to see if acquisitions in 2014 follow similar themes to those in 2013.
— Michael Collins is a partner withBuilding Industry Advisors. He leads the firm’s efforts in M&A, capital placement, and acquisition advisory for building products distributors and manufacturers. He can be reached at 312.854.8036 or[email protected]
