After a painfully slow second quarter and only a moderately paced third quarter due to COVID-19, consolidation in the building material sector has returned with a vengeance.

M&A activity has accelerated across many distribution verticals, but consolidation among companies serving the commercial, residential and specialty construction markets has reached a fever pitch with private equity at the center of much of recent deal-making.

In the past few days alone, some of the largest players in this space have traded hands with eye-popping dollar values well into the billions. Here’s what happened over the weekend.

• On Friday afternoon, US LBM, Buffalo Grove, Illinois, announced it has agreed to be acquired by Bain Capital Private Equity, which will own a majority stake in the company. Financial terms of the deal were not disclosed, but US LBM ranks sixth on the list of MDM’s 2020 Building & Construction Top Distributors. The company, which operates 37 divisions and more than 250 locations, has itself grown through acquisition in recent years, including one earlier this month.
• Late Sunday afternoon, news came that specialty building products distributor Foundation Building Materials Inc., Santa Ana, California, agreed to be acquired by an affiliate of the private equity firm American Securities LLC for $19.25 per share, or $1.4 billion, including outstanding debt. The seller is an affiliate of Lone Star Funds, another private equity firm, which acquired FBM in 2015 and has maintained majority ownership since the company’s initial public offering in 2017. Upon completion of the transaction, FBM will become a privately held company.

And then on Monday morning, two more mega deals were announced.

• HD Supply Holdings Inc. said it has agreed to be acquired by The Home Depot Inc. for $56 per share, or $8.7 billion. HD Supply, of course, was once part of Home Depot before being sold to a consortium of private equity firms, including Clayton, Dubilier & Rice, in 2007. The PE firms divested their interest in HD Supply when the company went public in 2013. In a nice symmetry, CD&R paid $2.5 billion for HD Supply’s Construction & Industrial – White Cap division this past September. (Related: Lowe’s last week denied rumors that it was pursuing HD Supply; analysts had projected one of the two big box home improvement chains to snatch HD Supply and its remaining Facilities Maintenance division.)
• Specialty building materials distributor PrimeSource, Irving, Texas, will be sold from one private equity firm to another. Its previous owner, Platinum Equity, announced Monday that it has agreed to sell the company — its official corporate moniker is PriSo Holding Corp. — to Clearlake Capital Group L.P. Financial terms of the deal were not disclosed.
• And Builders FirstSource Inc. and BMC Stock Holdings Inc. announced they had cleared a key regulatory hurdle in their $2.5 billion all-stock merger, which was unveiled in August.

What Does this M&A Surge Say About the Marketplace?

For all the handwringing earlier this year about M&A drying up as companies navigated the coronavirus crisis, their pent-up energy has resulted in some truly market-shifting deals.

The flurry of the last few days follows some massive deals from recent weeks and months such as the White Cap and Builders FirstSource/BMC deals already mentioned. Other building material distributors (including some above) have pulled the trigger on smaller market moves of late, including Builders FirstSource, Foundation Building Materials, SRS Distribution and US LBM Holdings.

The sector is so hot that one distributor — Huttig Building Products Inc., St. Louis, Missouri — received an “unsolicited, non-binding, expression of interest from Mill Road Capital Management LLC and its affiliated funds” to acquire the company for $2.75 a share, later increased to $4 per share. One of Huttig’s largest shareholders said the deal “significantly undervalued” the distributor.

What, if anything, does all this sound and fury signify about the building materials and construction markets? What we know is that these sectors do have some issues, according to Dave Manthey, an analyst at Baird.

For example, in his note to clients regarding the Foundation Building Materials deal, he wrote that commercial construction is likely to see a “W-shaped” recovery.

After the initial bump following the unprecedented dip in 2Q, he said, look for “slightly weaker overall conditions in 2021 as the project pipeline dries up. We assume non-res construction activity declines low double-digits. This is a similar magnitude to the 2001-2002 recessionary declines but lags the 20%+ declines of 2008-2009. We view October net sales trending down ~6% y/y even as most jobsite restrictions have been lifted as more consistent with our view, however.”

Also, “single-family residential construction a partial offset but likely to get more competitive. Record low mortgage rates, urban flight to suburbs, and low housing inventory should support a strong residential outlook for FBM.”

Could the same be true for all building materials players? Perhaps it’s too soon to tell, but either way, all of this red hot M&A activity is sure to shake up MDM’s Building & Construction Market Leaders list in 2021.