BIA Executive Insights
Analysis, strategy, and insights for decision makers in the building products industry.

December 2021
How LBM Deal Factors Will Evolve in 2022
By Michael Collins, Managing Director, BIA

Strange as it may sound, these are simultaneously busy, quiet, and changing times for all of us involved in helping dealers chart their futures. These final days of the year always feature a rush to finalize some transactions before the New Year's chime sounds. Meanwhile, discussions with clients about potential moves next year go quiet while they focus on family and friends. These days, I'm thinking about how the dealmaking environment will evolve in 2022 and what the implications are for both buyers and sellers.

Let's start with money. The Federal Reserve announced Dec. 15 that it expects to start raising interest rates as many as three times next year, in an attempt to slow the inflation rate. Those hikes almost certainly mean that buyers' borrowing costs will rise steadily in coming years. Deals that are very close to a buyer's minimum required rate of return may not happen as a result of these higher costs.

The Fed also is speeding up the pace at which it is reducing purchases of bonds and mortgage-backed securities. Pulling that support from those two markets will lead to an increase in mortgage and T-bill rates. The National Association of Home Builders predicts 30-year mortgage rates could rise above 3.6% by year-end 2022, while Zonda's chief economist predicts it'll be 3.5%. The current 30-year fixed rate is about 3.3%. While these rates are still very attractive compared to historical norms, every uptick makes home loans less affordable for thousands of people. And higher T-bill rates will make the bond market more attractive to investors.

Potential buyers of your business also will be looking at long-term housing trends. Zonda Chief Economist Ali Wolf predicts that single-family starts will rise 5.1% after going up about 12.0% this year. Demand remains strong: the median number of months that a new home was on the market in October was 2.4, dramatically less than the 3.0 months in 2019.

But then there's that affordability issue to consider again. The median price for a newly built home sold in October was $477,800. That's 21% higher than a year ago. And the median price for existing homes sold in October was 13.1% higher year-over-year, the National Association of Realtors notes. If prices keep going up--and Wolf predicts a 5.1% rise for new homes in 2022--starter and first-move-up homes will be even tougher to get into next year than they were this year.

These trends combine with two others--Millennials' home-purchasing surge and the rise in work-from-home arrangements--to suggest a trio of factors that buyers are likely to weigh when they review you in 2022.

* What's the rate of population growth in your market? Outer suburbs, smaller cities, and second-home markets all have seen an increase in full-time residents since COVID arrived. Bigger cities with lots of job opportunities--Austin, Texas, for example--also are benefiting from moves. If you can show population growth in your territory, you'll have an advantage.

* What about wage growth? Relatively well-off people who decide to stay in their vacation home year-round certainly will help your county's income statistics (as well as boost your potential remodeling business). And communities that have seen big businesses like Amazon and Target open warehouses usually discover that local businesses' wages have to go up to be competitive with what the big boxes are now paying.

* What is the cost of construction in your area? Construction materials prices as of November were 34.6% higher than a year earlier, according to the Census Bureau's latest Producer Price Index. All indications point to even more price increases in 2022. If that's the case, then the only way homes can remain reasonably priced is to build on cheaper land with fewer regulatory costs. Dealers in such areas likely will benefit should they choose to sell.

Of course, lots of other qualities that buyers look for remain unchanged: They'll want to see proof that you have a profitable, growing, well-run business with a quality leadership team. They'll examine how you met COVID's challenges and will weigh how much of your success is due to good management.

There's never really a "top of the market" that applies to all dealers; there are too many economic, demographic, and personal variables. These variables differ not only from dealer to dealer, but also from year to year. I look forward to helping you decide whether 2022 is the right time to make a change.
Construction supply companies involved in deals (blue dots), greenfield openings (black) or closures (red), YTD 2021. Not shown: One deal and one opening in Hawaii. Source: Webb Analytics
Heading Toward Year End, 2021's LBM Deals Map Look Near-Certain to Exceed 2020's
By Craig Webb, President, Webb Analytics

Past history and new inflation and tax concerns combine to suggest we'll see a lot more dots added by Dec. 31 to a 2021 LBM Deals Map that already is close to topping the numbers for all of 2020.

Through Dec. 15, a total of 120 transactions have caused at least 620 locations to change hands this year. That's way ahead of 2020's 73 deals covering 479 locations. This year's total still falls a bit short when you add in the roughly 162 BMC yards involved in its end-of-2020 merger with Builders FirstSource.

Meanwhile, greenfield openings are up dramatically, with 106 so far this year vs. 69 in all 2021. The number of closures is down--12 this year against 37 in 2020--but that news often takes longer to become known, so this year's number likely will rise.

It's common for dealmakers to sign documents as New Year's Eve looms, especially when construction supply companies are showing such good numbers. This year, we're likely to see the same flurry. But end-of-2021 activity also could be spurred by two concerns. One is the possibility that Congress will increase capital gains tax rates. The other is the certainty that the Federal Reserve will push up lending rates in 2022. Put it all together and you get the feeling that some sellers regard this as their opportunity to get maximum returns.

US LBM didn't buy the most yards in recent weeks, but what it acquired was choice: Barrons, a two-yard powerhouse in the Washington, DC, area; and Professional Builders Supply, a highly regarded, fast-growing dealer in the Carolinas. Meanwhile, another well-known dealer, Shepley Wood Products in Massachusetts, sold to Kodiak Building Partners.

In terms of dealer counts, the biggest acquirer recently was White Cap Supply, which bought Ram Tool Construction Supply's 44 yards, all east of the Mississippi. In second place was Central Network Retail Group, which purchased 23 Frattallone's Hardware stores spread across the Minneapolis-St. Paul market.


* ABC Supply bought Siding Sales inc., which has three stores in Kentucky, and opened for business in Lufkin, TX. Meanwhile, ABC's L&W Supply division held openings in West Palm Beach, FL, and Bedford Heights, OH.

* Employee-owned, Pennsylvania-based Your Building Centers bought the three-unit Allensville Planing Mills stores.

* Drywall specialist GMS bought Kimco, which has stores in Tampa and Brooksville, FL. In addition, its Rocky Top Materials division expanded to Johnson City, TN.

* Beacon sold its solar operations to a foreign-based solar specialist called BayWa r.e. Beacon's news releases said it had four stand-alone solar facilities and shared solar operations with six other facilities. It wasn't clear at press time how many of those facilities, if any, would transfer to BayWa r.e.'s control.

* W.E. Aubuchon, the nation's biggest family-owned hardware chain, bought four hardware stores in New Hope, Doylestown, Richboro, and Blue Bell, PA.

* SRS Distribution's Heritage Landscape Supply Group continued its rapid growth. Since mid-November it has acquired SBI Materials, a two-unit operation in Northern California, and two New York State firms: AGC Irrigation Supplies and North Shore Sprinkler Supplies.

* Gillman Home Center opened a new outlet in Hartford City, while R.P. Lumber did the same in Poplar Bluff, MO.

* 84 Lumber opened a store in Boise, ID, and closed its Kennedy, NY, location.
We Can Answer Your Most Pressing M&A Questions

* How do the most active buyers in today’s market value my company?
* What parts of the business should I change to improve its valuation?
* When is the right time to sell?

These are questions that are commonly asked by the owners of building products manufacturers and distributors. Our work in selling and raising capital for companies puts us in a unique position to help answer these important questions. Regardless of when you might decide to approach the market, please contact me to have a confidential discussion about your company and ways to maximize its value for the owners. 

Michael Collins
Work 312-854-8036
Cell 312-282-5462