What to Expect Regarding Future Acquisition Activity
Originally published by: LBM Journal — March 23, 2021
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It’s impossible to miss today’s white-hot LBM M&A market. Nearly every LBM Daily email newsletter from LBM Journal brings news of another LBM dealer being acquired by a private equity group or strategic acquirer. Make no mistake; there’s a race underway…a roll-up race by acquirers to consolidate lumber dealers into their portfolios, driven by a fragmented market sector ripe for consolidation, low interest rates, and a housing boom.
There was already a steady low-boil of M&A activity in early 2020. But then, last November, fuel was thrown on the M&A bonfire: U.S. LBM announced that it was being acquired by Bain Capital Private Equity.
Google Bain if you don’t already know its sterling reputation. Starting in 1984, Bain has acquired some 940 companies. Working in multiple industry sections, Bain has typically packaged various acquired companies into larger companies, which Bain has, or eventually will, sell off. (This is just what US LBM has done since 2009; a sort of mini-me Bain.)
So far, Bain has “exited” around 496 of its acquisitions, turning an impressive internal rate of return. You can eventually expect the same with Bain’s LBM dealer holdings.
When Bain jumps into an industry sector, it’s a signal that the industry has become so attractive that a top-flite private equity group has taken notice of a serious opportunity…and has opened its checkbook.
Recognizing the same opportunity that US LBM has seen, and that Bain now sees, other private-equity-fueled acquirers and strategic investors are creating their own empires, rolling up LBM dealers as fast as you can say “multiple of EBITDA.”
Here are just the major deals:
- Platinum Equity sold PrimeSource to Clearlake Capital Group.
- Foundation Building Materials and Beacon both acquired by American Securities.
- The Home Depot acquired HD Supply, after HS Supply sold Construction & Industrial– White Cap to Clayton, Dubilier & Rice.
- Clearlake Capital Group acquired TKE Holdings (Dimora Brands).
- BMC Stock Holdings merged with Builders FirstSource, and acquired TW Perry.
And that’s just a fraction of activity, the larger deals. To what end are all these acquisitions?
Perhaps these acquirers will eventually sell their aggregated business portfolios to Bain. Or perhaps their aim is to draw Bain into a bidding war with another acquirer for market-topping prices down the line. One thing is clear: What defines today’s M&A market is three categories of businesses: You’re either a buyer, a seller, or a company that risks being left behind to compete with increasingly large groups of affiliated dealers that can take advantage of scale and buying power to drive down your margins.
Not surprisingly, many of the acquisitions we are seeing are recapitalizations (“recaps”) where—as part of the purchase price—the acquirer grants stock to the sellers, so they have some ownership in the Newco being joined (or formed) by the acquisition. (Stock issued in a recap also reduces the cash the buyer needs for the acquisition.)
Is it time you get in the M&A game? Yes. We are at near-term peaks for prices being paid for companies. But there’s another reason: Being an early member of a consolidation effort, and taking stock as part of your selling price, can give you an advantageous equity position if the Newco splits those shares or there is a liquidity event. (For instance, just imagine the value of first-in shares of US LBM today.)
Is 2021 the new 2006, just before a downturn? If the economy does turn down, you will have to wait out another economic cycle to attain the prices you can get today, and that often takes three to four years, depending on how deep the cycle goes.
There is an interim step you can take. First, note that even if you went to market today, the entire process easily takes four months. Why not hire an investment banker, prepare a deal book, and test the water with acquirer to see what you can get for offers, terms, employment agreements, and stock?