MORE M&A AHEAD

HIGH-QUALITY ASSETS REMAIN IN DEMAND AS INVESTORS CONTINUE TO EXHIBIT CAUTION TOWARDS BUILDING PRODUCTS M&A

------------ BY ANDREW K. PETRYK

THE M&A MARKET has been operating in a wait-andsee mode for the first half of 2023 as buyers, sellers, and lenders look for greater clarity in the macroeconomic environment. Recent headwinds impacting the economy, inflation, and interest rates have had a cooling effect on the deal market and are tempering financing and valuations. In the Building Products market specifically, businesses directly tied to new construction have experienced greater pullback in demand as investors assess the impact of housing starts reverting from record highs experienced in early 2022:

• There is a continued flight to quality and increased front-end diligence with the challenge of evaluating the sustainability of recent performance as a key gating item. Dissecting real versus nominal growth is often the first and most critical item evaluated.

• A gap in valuation expectations exists between buyers and sellers, creating a disconnect in the market and leading some parties to wait for valuations to normalize.

• Debt markets are evolving. Lenders continue to show appetite for high-quality assets but are responding to market uncertainty in the form of reduced leverage and higher pricing. With reduced leverage, private equity sponsors are required to put more equity into deals with the commitment typically higher for transactions involving businesses heavily tied to the new construction market. Traditional bank financing has tightened with the void being filled by non-bank lenders which remain open for business.

Increased visibility will incite greater optimism into the M&A market and incentivize sidelined buyers and sellers to transact. Over the near-term, the market could see an easing of mortgage rates under the expectation of lower inflation, while recent positive trends in housing starts hold promise that the market may be entering a period of stabilization. Looking ahead, the long-term outlook for the residential new construction market remains favorable, underpinned by strong demand from an aging housing stock and a significant deficit of affordable single-family homes.

Despite the headwinds facing the market today, capital availability, which there is more than an ample supply of today, will continue to keep buyers in the market. Strategic acquirers are sitting on stockpiled cash and need to show growth, while private equity has put little dent in the oft-cited capital surplus ($800 billion+ reported by PitchBook at the end of Q3 ’22), with add-on acquisitions vital to platform buy-and-build strategies. Recent Building Products M&A activity reflects a healthy mix of strategic and private equity buyers, indicative of the appetite to put money to work.

In June 2023, PGT Innovations acquired the remaining 25% ownership interest in Eco Enterprises (Eco), a manufacturer of aluminum, impact-resistant windows and doors primarily serving the south Florida region. “We’re very excited to reach the finalization of this purchase as it will allow us to further serve high growth markets in which we operate,” said CEO Jeff Jackson, commenting on the transaction. PGT Innovations acquired a 75% equity stake in Eco back in 2021. In addition to realizing revenue growth and margin expansion, PGT Innovations added glass production capacity, furthering its vertical integration strategy.

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