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

December 2019
Three Perspectives on LBM's Dealmaking Prospects for 2020 ... and Beyond
By Michael Collins, Managing Director, BIA

Completing mergers and acquisitions in construction supply compels you to play an endless game of compare and contrast. How are business conditions now versus what they were … and what might they become? What is a company’s potential versus its current performance? If it was the wrong time to buy or sell months ago, is it the right time now?

The game heightens at year-end (and in 2019’s case, at decade’s end). Thus, when I’m asked “What’s the climate and the forecast for LBM deals?” my immediate response is: “Compared to what?” Then I follow up quickly with these three perspectives.

The Window Is Still Open
If you were to open The New York Times about this time last year, you’d see headlines like “Whiplash on Wall Street as Tensions About Global Economy Mount.” The Standard & Poor’s 500 dropped 11% last December alone. Investor expectations of a recession rose. And many feared the window of dealmaking opportunity had slammed shut. That pessimism continued during the first months of this year as bad weather slowed construction across huge swaths of the nation.

Despite those ill tidings, the stock market recovered almost immediately in January and dealers’ sales started picking up speed by late spring. Many dealers are finishing with the kind of numbers that you wouldn’t have thought possible last spring. Meanwhile, investors kept looking. And they remain active, buoyed by a strong (but not exactly robust) economy that features particularly good jobs and consumer spending numbers. 

Short-Term, Buyers Are Cautious
But while buyers never abandoned the table, the majority are careful. Many tell me that they tend to look only at prospects in their existing or in an adjacent geographic territory. They work to avoid even minor channel conflicts. They keep an eye out for signs our decade-long streak of economic growth has neared the end. One result this year has been a lack of blockbuster deals in the lumberyard space and an abundance of small, almost unique finds that stem from long-time relationships between seller and buyer.

There’s a chance that investors will get more active in 2020 because of another compare-and-contrast factor: Year-over-year financials. Unless we get another bout of nasty weather, the first-quarter 2020 numbers almost certainly will look great in comparison to 2019’s. Higher sales and fatter profits always make a company look more attractive, even after buyers have reminded themselves that the previous year was a downer.

Other Investors Look to the Future
Then there’s another group of potential investors who appear to not be worrying about 2020 at all. Instead, they are focusing on the fundamentals that influence how a dealer will perform in that market three, five, and even 10 years from now. They are looking at the area’s number of millennials and baby boomers, how the region has fared compared with the last recession, and the region’s remodeling spending and job forecasts. Then there are overlapping factors to weigh, such as what’s likely to happen with interest rates and with long-term commodity prices.

For such buyers, what you do matters in your valuation, but where you operate might matter more. If you’re in an area that compares well with other markets, the window of opportunity for you likely will remain open even if it begins to shut for others. 

Regardless of what kind of market you’re in, and how your current situation compares with the recent past, we can help you deliver the perspective that will bring investors to your door.
Will Construction's Next Revolution Succeed?
Keep an Eye on the Foot Soldiers Within LBM
By Craig Webb
President, Webb Analytics

I’ve often felt that building material dealers are like the minor characters in countless Star Trek episodes who take the heroic, often fatal, action that enables the USS Enterprise to survive and Capt. Kirk to emerge victorious. Like those actors, dealers get little to no credit for the role they play.

That feeling came over me several times this fall as I was investigating the increasingly important world of offsite component manufacturing. New technological developments and a continuing labor shortage are combining to promote increased use of long-established products like trusses and panels as well as newcomers like mass timber, advanced modular construction, and pre-cut, pre-labeled framing packages. They suggest that building in 2029 will be markedly different than it is in 2019.

What struck me during this research was that architects, builders, academics and consultants did almost all the talking, while people in the building supply community rarely took the stage. This struck me as odd. The industrialization of wood-based construction has to surmount several obstacles if it is to become a standard practice in this country. Who’s going to figure out how we’ll get there? 

Don’t look to architects; they spend much of their time imagining structures that engineers are hard-pressed to keep upright. And don’t expect many builders to lead the way; their idea of building often begins with finding the land and ends with hiring a contractor to do all the drilling and nailing.

Instead, I’m putting my money on the building material suppler. 

An inspection of name tags at several conferences I attended this fall showed numerous LBM people, typically hailing from a lumberyard’s component-making subsidiary. As they listened to the visionaries, you could almost see the wheels spin in as they calculated how to make this revolution a practical and profitable endeavor.

Dealers’ work handling material take-offs has made them de facto quality control officers as well as the most likely people to spot ways the construction process can become more efficient. And because so many of them actually make the trusses and panels, they also are in position to both improve the process and help talk slow-to-adapt builders and framers into taking the plunge.

As the saying goes, there are no small roles, only small actors. As you watch this drama unfold on the construction stage, keep an eye on the dealers.
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SRS Leads the Way in 4th Quarter's LBM Deals
Look in January’s BIA Executive Insights for a comprehensive, data- and map-heavy review of LBM’s M&A market in 2019, but as things now stand you can expect three headlines:

First, the total number of deals, openings, and closures is likely to be about 10% lower in 2019 than in 2018.

Second, the biggest moves in 2019 didn’t involve specialists in lumber, roofing, or drywall. Rather, it was SRS Acquisition’s leap into the landscaping and irrigation business. The latest SRS deal had its Heritage Landscape Supply Group buy Florida Irrigation Suppl y, a 42-branch operation with stores in Florida, Georgia, Alabama, and North Carolina. The roofing side of SRS also figured into the second-biggest deal, in which the company expanded dramatically in Utah by acquiring Roofers Supply , which has six branches in the Beehive State.

And third, there were more than 100 greenfield openings in 2019, particularly by roofing dealers.

Meanwhile, here’s a roundup of significant actions that have taken place since Oct. 1:

* BMC acquired DeFord Lumber , which has lumber, truss, and millwork divisions in Duncanville, TX.

* Builders FirstSource supplemented its growing truss and components operations by acquiring Raney Components and Raney Builders of Groveland, FL.

* US LBM bought Forge Lumber of Erlanger, KY, and Cincinnati. In addition, US LBM’s Universal Supply branch expanded in Maryland by opening a store in Easton.

* Busy Beaver opened True Value of Canton (OH ).

* ABC Supply opened a store in Framingham, MA.

* L&W Supply , a unit of ABC Supply, opened a greenfield store in Glendale, AZ.

* Texas institution Higginbotham Bros. invaded Oklahoma for the first time when it acquired White’s Ace Building Centers of Shawnee and Seminole.

* GMS opened a branch of GTS Interior Supply in Wilsonville, OR. GMS also returned to Canada by purchasing Rigney Building Supplies of Kingston, ON

* Sunrise Builders Supply opened in Arlington, TN, as did Ace Lumber & Hardwar e in Bradford, PA.

* 84 Lumber closed yards in Fairmont, WV, and Baldwinsville, NY, according to press reports.

* Auction websites list several unnamed dealers who have put themselves up for sale. One is in Arkansas and claims $3 million in annual sales and $300,000 in EBITDA. Another is a 10-year-old operation in Hialeah that, for $150,000, buys you $100,000 worth of inventory and $20,000 worth of in-store racks and stands. And the third, north of Madison, TN, includes in its $1 million sales price $300,000 worth of inventory, 5 acres of land, and a 2,400-square-foot house.
Join Me and Several of LBM’s Key Deal Makers
For My 2020 ProSales 100 Conference Panel
One of my favorite tasks every year is to invite several of the nation’s most important deal-oriented LBM dealers to join me in a discussion on M&A trends at the ProSales 100 Conference. The 2020 event will take place Feb. 26-28 at Live! by Loews in Arlington, TX, and I’m pleased to report that the 2020 lineup is looking as strong as ever.

This year, we expect to have on the stage L.T. Gibson of US LBM, David Flitman of BMC, and Chris Costello of Timberline Enterprises. The conference also will feature a keynote from Chick-fil-A CEO Dee Ann Turner, an executive panel with Peter Jackson of Builders First Source and Walter Foxworth of Foxworth-Galbraith, and sessions on timber construction, the economy, automated transportation, business analytics, digital channels, and the supply chain. Sign up at http://prosales100conf.com .
What to Think of Katerra? Recent Reports Suggest Both Problems and Success
Elephants get noticed a lot in the bush, even when you’re hunting for smaller beasts. So it is with Katerra and independent building material dealers. As they hunt for construction supply companies to buy, investors can’t help but hear about—and be influenced by—what’s going on at this Silicon Valley company that aims to revolutionize construction.

And there has been much to notice in recent weeks. First, Katerra confirmed that it’s closing the factory in Phoenix that was its first production facility. The company also sold a components plant in nearby Glendale, AZ. Those reports provided a vehicle for stories about how Katerra was having trouble finishing projects and was nowhere near as efficient in its operations as it aspired to be. Further tut-tutting occurred with news that Fritz Wolff, a co-founder and key early backer, had left Katerra’s board of directors. Problems with Katerra’s biggest backer, SoftBank, because of that company’s troubles with its WeWork investment, also gave rise to speculation about whether Katerra was similarly suspect.

Seemingly in reply, Katerra CEO Michael Marks published an end-of-year update that cited numerous achievements:

  • $1.7 billion in revenue in 2019, double the previous year’s sales.

  • $4 billion in project backlogs and a project pipeline topping $15 billion.

  • More than 8,000 global employees.

And perhaps most significantly, Marks said, “we are on a path to operating profitably in 2020.”

Marks paid heed to the news about Wolff by saying Wolff’s private equity real estate company—a big player in multifamily housing—represents 15% of Katerra’s customer base. He also pointed out that SoftBank wasn’t Katerra’s only investor.

Marks didn’t directly address the reports of problems creating materials and building buildings, but he did say: “Yes, we have had many learnings along the way. We can say with pride, though, that once we begin a project, we never walk away from that job. And our customers understand that and award us new projects.”

Katerra’s size, breadth, and ambition are likely to continue to draw attention. So far its focus has been on the multifamily market, and its next targets in the U.S. are likely to be in hospitality, senior living, and student housing—in other words, nowhere near where most independent building material dealers play. Still, comparison might arise. In such a case, your best response may be that, unlike certain other firms, you’re certain you make money
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