The building products and materials industry is surging as we emerge from the COVID-19 pandemic, driven by strong consumer demand, an underbuilt housing market and several demographic shifts that will support robust growth in the years ahead. The strength of the industry is apparent to anyone who owns a building products company, as order activity and backlog are up significantly over last year. What is likely less clear is how these conditions influence valuations and potential buyer appetite.
According to analyses of past recessions by the Harris Williams Building Products & Materials Group, there is more buyer activity and valuations are higher earlier in the cycle, which corresponds to today’s market. For business owners who are thinking about selling their business, sooner is better than later.
“When we look at past recessions and recoveries, we see a clear pattern,” says Tim Webb, a managing director. “Coming out of a recovery, you have a large buyer universe and strong valuations, creating an optimal environment for a seller.”
Specifically, Webb points to heightened interest in the sector among private equity buyers in the early stages of recoveries. “From 2012 to 2015, PEGs were the buyers in roughly 60% of deals, and they were about a turn below strategics in terms of EBITDA multiple. It was a great time to be a seller, with strong competition for solid companies in the sector.”
In comparison, between 2016 and 2019, financial buyers became significantly less active in building products deals, prevailing just 33% of the time. And while the multiples paid by strategic buyers were steady at 10.0x EBITDA, PEGs paid 8.9x on average, nearly a half turn below their level at the start of the recovery. “As the recovery continued, PEGs started to lose interest in the sector and speculate on the end of the cycle,” notes Graham Rives, a director. “We saw fewer sponsors aggressively pursuing building products platforms. It was mostly those with a contrarian view who prevailed in processes during the later stages of the cycle.” Rives adds that, given the length of the last recovery, buyers were understandably modeling downturns during their hold period, which impacted both leverage and valuation levels. He says that relative lack of competition and conviction made it a less favorable time to be a seller.
We found the early-recovery pattern to be holding true in the most recent spate of building products deals. “Interest is strong again among PEGs, and our data shows sponsors winning 65% of deals in 2020 and 2021,” says Mike Hogan, a managing director. “And while strategics still lead in terms of multiples, PEGs are at substantially higher levels than they were between 2016 and 2019 and nearly a full turn higher than in the early stages of the last recovery.”
Further highlighting the uniqueness of today’s building products M&A market is the fact that buyers are paying early-cycle multiples for businesses with strong earnings. Notes Rives, “Usually, when we see buyers paying those elevated, early-cycle multiples, it’s on an earnings base that reflects initial stages of the recovery. If you look at the broader building products sector, new construction activity has been robust with new housing starts at or above long-term averages, and repair and remodel activity has shown great resiliency over the last 12 months. The combination of high multiples against strong earnings reflects buyer confidence in the sector and creates an ideal environment for sellers.”
The upshot: Now is the time for building products and materials companies to take advantage of surging interest in the space. “If going to market is on the agenda, companies should quickly take action,” concludes Webb. “The industry will continue to provide good growth opportunities for years to come, but there is unlikely to be a better time to exit than right now.”
Harris Williams has a successful track record advising companies across a broad spectrum of building products and materials sectors. Our expertise ranges from products used in residential and commercial markets to heavy construction materials used in infrastructure applications. Within these sectors, our firm has worked with clients who touch every aspect of the production, distribution, and related construction services in these markets.