Industrials Sector Comment – June 2014

Date

The building products market has stabilised over the past year and is now showing clear signs of a return to growth. The strong upturn in new house building in the UK has been a cornerstone of this changing environment. It is coupled with the Government commitment to significant investment in new infrastructure, as well as the wider economic recovery which has stimulated a strengthening of the building renovations space. This improvement in the market is also driving increased mergers and acquisitions (M&A) activity, thanks to both strategic and private equity interest.

Many corporate players in the building products sector have significantly strengthened their balance sheets following the economic downturn and have accumulated strong cash piles which they intend to use for acquisitions. The proposed merger of Holcim AG and Lafarge SA is also expected to drive acquisition activity in the heavyside market, particularly at the wider European level, as the competition authorities propose disposals from the enlarged group.

The corporate groups which have spent the past few years reorganising their own operations are now able to turn their minds towards inorganic growth and meeting the demands of the construction industry as it expands once again. With this mind, many multinational groups are even coming under pressure from their institutional shareholders to utilise their cash for acquisitions, rather than share buy-backs or dividends. It is therefore expected that many groups will be seeking to acquire smaller and mid-sized players as output catches up with demand. Whereas distressed or opportunistic acquisitions have been a feature of the market over recent years, strategic purchasers are now focusing on expanding their product portfolios into important growth segments driven by environmental initiatives, legislative changes and market demand.

Probably most significantly, smaller and mid-sized companies are attractive acquisition targets because of the fact that they have demonstrated resilience throughout the downturn. In a fragmented market which is still characterised by local and regional players, it is these very businesses which offer differentiated product portfolios, supply chain credibility and embedded customer relationships which are attractive to potential acquirers.

It is for these reasons that private equity investors are also showing a renewed interest in the sector. As business performance in the sector improves, private equity houses have recognised that the investment window has opened up for them. Significantly, they are also benefitting from an improved banking environment to compete with trade bidders on price. The recurring themes for many private equity firms focusing on the building products sector are products or services focused on building efficiencies, cost control and energy optimisation.

The knock-on effect of the increased interest from strategic purchasers and private equity firms is that valuations in the building products sector are rising once again. At the end of 2013, the private firm H2 Equity Partners acquired the UK Profiles division of Tessenderlo SA. The business, which trades under the name Eurocell, is a manufacturer of PVC window and door profiles as well as a supplier of roofline and other building products. It also operates a PVC recycling facility. This transaction followed the earlier investment by private equity firm HIG Capital in Synseal Extrusions Ltd, which is also a UK manufacturer of window and door profiles.

Other private equity players which are active in the market include Apollo Global Management and Ares Management which jointly own Jacuzzi Brands Inc and Gores Group, which acquired the German roofing products distributor Melle Dachbaustoffe GmbH from SIG plc last year.

Meanwhile, Clearwater’s Industrials team built on its long history of advising on M&A in the building products sector with the sale of Door-Stop International Ltd to Masonite International Corp earlier this year. Door-Stop is a sector leader in the production of composite doors.

Other building products transactions completed by Clearwater’s Industrials team include the sale of AmbiRad Ltd to Thomas & Betts Corp; the sale of i2S Group Ltd to United Technologies Corp; the sale of UGS Ltd to BSS Group plc, prior to its acquisition by Travis Perkins plc; and the acquisition of Quintex Ltd by Fleming Family & Partners.