Historically, mergers and acquisitions (M&A) have played a central role in the development and evolution of the global building products sector. Over recent years, we have seen further rounds of consolidation in certain segments (e.g. heavyside materials) and rationalisation of non-core activities in others (e.g. lightside materials and distribution).
we expect M&A activity in this market to remain dynamic with large groups continuing to evolve their strategies and emerging players seeking to accelerate growth
Notwithstanding the shock and disruption caused by COVID-19, we expect M&A activity in this market to remain dynamic with large groups continuing to evolve their strategies and emerging players seeking to accelerate growth and build scale. We believe the market fundamentals of the broader building products sector will remain highly attractive and as such we expect continued interest from the private equity (PE) community, who are increasingly drawn to resilience as a key attribute for new investments.
In an effort to slow the spread of the virus, governments around the world have implemented various short-term measures which have led to significant restrictions for the majority of businesses. The impact of these measures on those operating in the building products sector has been visible in Western markets since the middle of March, however the severity and operational impact of the restrictions varies significantly from country to country, and between sub-sectors.
In North America, for example, construction has to-date been deemed an ‘essential activity’ and has been permitted to continue, provided appropriate safety measures are implemented. Lower levels of activity have been experienced in April and May, but healthy backlogs and a favourable bidding environment provide a positive outlook for businesses.
Europe has been more significantly impacted, with nationwide shutdowns implemented across a number of Western European markets, including the UK, France and Ireland. In the UK, the Construction Products Association (CPA) have published scenarios for construction as part of their analysis of the market impact, with the main scenario including the relaxation of social distancing restrictions from mid-May and a recovery in construction activity from June. Overall, construction output is anticipated to fall by 25% in 2020. This is seen across all sectors, with private new housing and private new commercial hit the hardest. The least affected new work sectors are infrastructure and public non-housing. Groups active in these latter areas will likely, in most part, emerge from the crisis in good financial health and will be able to evidence impressive levels of resilience to prospective acquirers.
construction output is expected to rebound significantly
In 2021, construction output is expected to rebound significantly (+26%) according to the CPA. All sectors are expected to rise, with infrastructure seeing the largest increase of 40% due to HS2 works gaining notice to proceed. Private new housing is expected to see the second biggest increase of 36%, due to improving economic conditions and government stimulus through the extension of Help to Buy and incentives for affordable housing.
We believe there is room for positive surprises in M&A during Q3 and Q4 of 2020, with certain sub-sectors (e.g. those with particular links to public infrastructure spend) already showing signs of a sharp “V” shaped recovery. Those businesses experiencing more of a “U” shaped recovery will inevitably require more time to demonstrate a return to “normal” trading before entering into formal sale processes. Uncertainties around the broader medium-term economic outlook remain, but if we have learnt anything from the COVID-19 pandemic, it is that things can change much more quickly than expected.
players in this segment are rapidly developing into wider service providers
Builders merchants and building products distributors constitute important routes to market. As well as acting as crucial supply chain managers, players in this segment are rapidly developing into wider service providers with the ability to source key building products and provide considerable advisory services to their customers. Builders merchants and distributors are increasingly widening their product portfolios in order to take full advantage of their market position. This means that traditional builders merchants will look to extend their offerings to related product areas including building chemicals, fittings and fixtures, and tools.
The building equipment market is developing rapidly as end-users seek ever more automation in their equipment requirements. The market is seeing an increase in demand for equipment, which is more energy efficient, whilst also offers ever greater operational efficiencies and a reduction in labour costs. Many end-users are also seeking building equipment with integrated monitoring capabilities which allows them to track their utilisation to a much greater extent.
The flooring market has seen significant M&A activity in recent years as major global groups have been extending their product portfolios and widening their geographic reach. The market is being driven by greater consumer awareness of flooring as part of interior decoration. It is also seeking the adoption of ever more resilient products which mitigate the effects of wear and tear and which see longer replacement cycles as well as broadening of product ranges with new colours, designs and dimensions all coming into play.
The heavyside market is being driven in particular by ever greater expenditure on infrastructure with the expansion and extension of highway and railway networks being a key priority across the world. As a result, the market for aggregates, cement, mortar, precast concrete products, ready-mix concrete, screed and structural adhesives is seeing strong growth. At the same time, there is an increasing focus on related segments of the market including flood and stormwater management, pipework and roofing.
Heating, Ventilation & Air Conditioning
The heating, ventilation and air conditioning (HVAC) equipment market is seeing rapid developments at present. The market is characterised by increased demand for automation and energy efficiency, as well as pollution control. HVAC equipment is requiring ever deeper integration with wider building control systems therefore product developments are seeing new technologies based on ever improved fluid mechanics, heat transfer capabilities and thermodynamics. De-gasification and de-carbonisation are themes which will continue to shape the longer-term future of heating systems.
The lightside building products market is characterised by considerable consolidation which is being driven by large groups seeking to enhance their portfolios of products. Whether they be manufacturers or distributors, this strategy provides them with considerable cross-selling opportunities, as one-stop-shop suppliers. As a result, some groups are also looking for ways to expand their offerings in a way that brings greater connectivity and cross-selling opportunities between different products groups.
Windows & Doors
The windows and doors market regularly sees M&A activity as large groups look to expand their product ranges and incorporate new developments involving aluminium and composite products. The market benefits consistently from commercial property overhauls, new housebuilding, private refurbishments and the renovation of public sector housing. At the same time, the players in the sector are having to mitigate several challenges including cost management as raw materials prices increase, the overall maturity of the market and the modest take-up of new products, and the increasing adoption of ever more stringent building regulations.