19 Apr Building Products Industry Update – Q1 2018
Despite a slight pull-back in 2017, building products sector M&A activity remained strong with 117 transactions, during the year representing approximately $4.9 billion in deal value. Robust acquisition activity has continued into 2018, as the number of transactions in the first quarter increased 8.8% over the same period from a year earlier.
The current favorable M&A environment has been supported by increases in both residential and non-residential construction, as well as increased spending for home repair and remodeling. We expect M&A activity to remain strong through 2018 driven by low interest rates, strong economic fundamentals, healthy levels of corporate cash balances, and access to cap¬ital available through debt and equity markets. Additionally, the enactment of corporate-friendly tax reform is expected to further accelerate acquisition activity.
The building products sector remains a highly competitive marketplace with larger players benefiting from scale. Both strategic and financial buyers are looking to capitalize on expanded economies of scale and expand their scope by filling gaps in existing product offerings. In addition, these firms will continue to search out new geographic market opportunities. As a result, we expect companies with strong brands and a value-added proposition to likely become acquisition candidates.
We’re also continuing to pay close attention to the competitive tension from e-commerce players. Al¬though penetration in building products has lagged consumer categories, the sector is not completely insulated from the so-called Amazon effect. Amazon’s B2B unit currently hosts 13MM home improvement and 3MM building material SKUs. The program, which launched three years ago, has since realized a five-fold increase in its home improvement revenue – by some estimates, Amazon’s home improvement sales could outpace Menards’ in 2018. Additionally, Amazon’s Home Service feature places customers in direct contact with professionals for bulky or behind-the-wall installation projects, and can potentially offset the key advantages of brick-and-mortar competitors. Consequently, residential building products category leaders are racing to get in front of this challenge by investing in downstream e-commerce tools and building out their direct-ship capabilities.
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