Here's What Drove 143 M&A Deals In 2021's Supply Channel
Five bullet points strike strong similarities to the key catalysts that have been triggers, and continue to drive homebuilder mergers and acquisitions activity beyond the norm.
- An explosive safe-haven, high-yield-investment-fueled proliferation of national, regional, and local buyers, including strategic, financial, global, sovereign wealth, and hybrid entities
- Local scale and operations concentration in geographic markets that match America's shifting pandemic mobility and migration pivot to secondary and tertiary markets, and new path of growth metro-area peripheries where new housing activity – including the built-for-rent juggernaut – has surged.
- Cycle-timing sellers picking a generational moment to a) remove the burden of personally-guaranteed debt, b) optimize an earn-out, and c) gain the option of a graceful exit over time, or a more-immediate handover to new management
- A seismic – pandemic-fueled – convulsion with respect to patient operating capital needs as the in-and-out flow of goods and revenue undergo violent disruptions, requiring players to turn to stocking inventory vs. sourcing a just-in-time, lean, even-flow stream of goods that need virtually no warehousing, and less channel cost
- A slow-but-sure pivot toward industrialized, stacked-multitrade production in offsite facilities, as exponentially-advancing data and technologies and off-balance sheet capital structures begin to favorably bend both fixed and variable construction costs, and at the same time, reduce growing exposure to skilled-worker constraints.
But these deal drivers don't only describe dynamics among homebuilding firms looking to strengthen geographical, market-segment and price-tier exposure, or take financial risk chips off the tables of entrepreneurial principals and founders. They're also what's galvanizing a hot market in every dimension of residential construction capability, including, of course, everything that goes to a construction job site and becomes part of the 450 SKUs that make each house a home.
At Webb Analytics today, you can get founder and president Craig Webb's exclusive dive into the data of construction's building products and materials channel capability at a moment that capability – the literal nuts and bolts of vertical value creation – undergoes continued stress and shock to its fundamental workings as the macro housing market powers forward in 2022.
Just today, a New York Times piece by Emily Badger notes that builders' struggles with their building products and materials supply chains now regularly elongate building schedules by months, with so little reprieve in sight that they've begun to implore local inspection officials for temporary waivers to approve new homes that are finished ... other than that they lack their new garage doors. Badger writes:
In Sacramento, the national homebuilder Lennar asked the city’s building department for a reprieve from garage door requirements.
“This is probably the first time I’ve ever been involved with a supply-chain issue,” said Winfred DeLeon, Sacramento’s chief building official. The department came up with a provisional agreement — to be signed by the bank and the home buyer — allowing a home to be occupied with painted plywood sealing the garage.
The lumber, building products, and materials channel is by its nature reliant on the dynamic free-flow of goods through ports, across shared borders with Canada and Mexico, over incalculable miles of trucking routes, into staging and loading docks and shipping areas. The complex and constant-motion marketplace serves as a physical-world real-time barometer of a massive imbalance between the amount of new global capital burrowing its way into every nook and cranny of residential real estate development and construction and the land, labor, and materials capacity constraints of those nooks and crannies.
Craig Webb, a TBD Dream Teamer, calls out 2021 as a bang-up year for deal flow in the pro residential construction supply space, as that rocket-fuel of capital, new housing activity, and strategic pursuit of deep, l0cal-scale powered efficiencies and margins motivated acquisition activity.
The News
Pro-oriented, residentially focused construction supply companies acquired 671 locations and opened 154 others in 2021, capping one of the busiest years for ever for lumberyards, specialty dealers, and related firms, Webb Analytics’ just-released 2021 Deals Report finds.
This year’s version of the consulting company’s annual report counts 148 mergers and acquisitions last year by 73 entities. That’s a 21% increase over the number of lumber and building material (LBM) sector deals in 2020. Meanwhile the number of greenfield openings more than doubled 2020’s total. Here’s a summary of the action since 2018:
'One-sixth of last year’s openings, as well as 78% of the larger-than-usual 67 closings, stem from what has happened since Builders FirstSource and BMC merged in January 2020,' Webb Analytics President Craig Webb said. 'You also might say the count was affected by an expanded definition of what we call a construction supply firm. But the core areas—lumber, roofing/siding, and drywall—showed robust growth on their own.'”
Here's how this looks, tabled and charted:
What It Means for Builders
While Webb's analysis largely leaves buyer and seller motivations to informed conjecture, macro financial, economic, and investment hypothesis dynamics continue to focus on positive fundamentals of demographics and finance – namely the coming to family formation and household primacy of America's largest cohort, Millennials, still-relatively favorable borrowing costs, strong household balance sheets, healthy employment and wage trends, and above all, atypically scarce inventory of homes for sale.
Webb notes that 2021 deal activity – which he suggests could well continue at a high-velocity in 2022, driven by the same factors of de-risking debt exposure, advancing tech and data efficiency platforms, and deep local scale opportunities – differs from the decade-plus-earlier hyperactivity of the pre-Great Recession LBM market concentration, where relatively few strategic buyers trolled for roll-up targets.
That era saw ProBuild and Stock Building Supply take over scores of companies before they stumbled during the Great Recession and ultimately became part of BFS. In those days, the buyers were relatively few. This era, by contrast, appears to have a large number of suitors, including regional players like TAL Holdings and Pleasant River Lumber as well as national giants like US LBM and SRS Distribution.
At the same time, residential construction's cyclical boom-and-bust nature, and a raft of pressures that tend to squeeze smaller, less capitalized, less technologically advanced operators in the pro channel – not to mention the fact that a fair number of multigenerational operators lack for a family-member succession plan -- have begun to exert a pressure of its own.
Says Webb:
If you focus solely on what happened lumberyards, component plants, drywall outlets, and roofing-siding operations, it’s clear that M&A activity has grown, particularly for lumberyards and at manufacturers that produce trusses, panels, and millwork products.”
Among the drivers that might continue to ratchet up strategically located entity valuations in the LBM channel is one that continues to reflect an enormous imbalance between a global thirst for capital yield and U.S. construction's constrained capacity to build more, better, faster.
Now that inflation and interest-rate pressures stand to test new home price elasticity to its limits, and order flows continue to expand, channel partners either empower builders to complete homes before the price elasticity break-point, or they don't get a place in the game.
When critical links in builders' supply chains break, they're going to find new ones that aren't as much of a risk, which makes some LBM operators – but not all – more and more valuable in 2022.