SECTOR INSIGHT Building Products SECTOR INSIGHT//BUILDING PRODUCTS Contents p2 Building products overview p4 M&A Review p6 Deciphering the UK housing sector conundrum p9 Deal insight, opening doors pg10 Our expertise DEALS DONE RIGHT. LIVINGSTONEPARTNERS.COM BUILDING PRODUCTS OVERVIEW The construction sector has proved to be relatively resilient since Brexit, bringing welcome relief to those who had concerns about the sector’s ability to weather the uncertainty that followed last June’s historic decision to leave the EU. Future sector development activity will be The leading UK key builders’ merchanting recently downgraded its 2018 forecast spearheaded by a considerable increase groups have also benefitted from the for the sector from 1.2% to 0.7%, the in infrastructure spending, underpinned benign outlook, with their average EV / slowest rate of growth in six years, citing by a long term national infrastructure EBITDA multiples rising by almost 50% a combination of a softening economy and construction pipeline valued at over since the EU referendum. Several, such as and rising costs. This follows on from £500bn – over two-thirds of which is Grafton and Wolesely, are seeking to drive the PMI Index hitting an 11 month low of allocated to 219 major projects in the growth internationally whilst the likes of SIG 5.9% in July, driven by a combination of Energy and Transport sectors. Included and Travis Perkins continue to realign their lower commerical building volumes and in this are transformative projects such extensive portfolio of businesses. heightened macro-uncertainty delaying as Hinkley Point C, HS2 and the Thames projects. Tideway Tunnel, which will provide a It is not all plain sailing, with inflation significant fillip to a vast array of suppliers rearing its head at a faster rate recently. M&A volumes in the sector remain robust across the building materials value-chain. Sterling’s post-referendum depreciation has with healthy appetite from both trade, led to upward pricing pressures, particularly which traditionally dominates M&A activity A considerable increase in new housing pertinent when an estimated 25% of all in the sector, and private equity. The output, with a government target of one materials used in the construction sector combination of a robust infrastructure million additional new homes in the UK by are imported. SMEs are likely to bear the investment pipeline and sterling’s the end of this parliament, will add further brunt of these increases far more than their weakness has already resulted in an weight to the sector. This is evident from larger peers. increase in cross-border M&A activity in the the industry benchmark PMI index hitting a sector, principally from North America. 17-month high in May, driven by a significant We therefore expect margin pressures to rise in residential housebuilding (and the be a more pronounced feature amongst the fastest rate of growth since December former group in the short-to-mid-term. The 2015). Construction Products Association (CPA) Infrastructure Projects UK Builders Merchants EV/EBITDA 16.0x EST. PROJECT DESCRIPTION SECTOR £BN DOC Cross Rail 2 High Speed railway line linking London and the North Transport 2033 55.7 14.0x Hinkley Point C New nuclear plant Energy 2024 20.3 Wyfla B New nuclear plant Energy 2025 15.0 12.0x Cross Rail Cross-London railway line Transport 2019 14.8 Network Rail CP5 Nationwide maintenance and renewal programme (2014-19) Transport 2019 14.8 10.0x Moorside Nuclear Power Plant New nuclear plant Energy 2029 13.9 Thameslink Programme Upgrade and expansion of Thameslink rail network Transport 2019 6.5 8.0x Thames Tideway Scheme Cross-London overflow sewer Water 2023 4.2 Highways England UK nationwide road upgrades Transport 2020 4.0 6.0x Network Rail Upgrade to rail network in the North of England Transport 2022 3.9 Hornsea Project ONE World's largest offshire wind farm Energy 2021 2.9 4.0x Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 IHS / Markit CIPS PMI Index GB Construction Output , chained volume measure (seasonally adjusted) 62.0 130.0 60.0 125.0 120.0 58.0 115.0 56.0 110.0 54.0 105.0 52.0 100.0 95.0 50.0 90.0 48.0 85.0 46.0 80.0 Jul-10 Mar-11 Nov-11 Jul-12 Mar-13 Nov-13 Jul-14 Mar-15 Nov-15 Jul-16 Mar-17 44.0 All work All new work Repair and maintenance Jul-15 Aug-15 Sept-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sept-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Sources: ONS, IHS / Markit, S&P Capital IQ, Livingstone Analysis PAGE 3//LIVINGSTONEPARTNERS.COM SECTOR INSIGHT//BUILDING PRODUCTS M&A REVIEW The UK building products sector witnessed an uptick in M&A activity in 2016 with 46 completed transactions, 31% up on 2015. This encouraging performance occurred despite considerable political and economic uncertainty – interestingly almost two-thirds of transactions in 2016 completed post-Brexit. This positive momentum has seemingly continued in 2017 with 28 transactions completed year to date. Whilst M&A volumes are at healthy A shifting overseas acquirer mix Notable deals with US acquirers include levels, it is evident that the number of A number of different industry sectors NYSE-listed Applied Technologies big-ticket transactions in the sector have benefitted from an uptick in Inc., acquiring Stirling Lloyd, a has reduced considerably in the past cross-border M&A activity as a direct supplier of high-performance liquid 18 months. Uncertainty has affected result of the post-referendum decline waterproofing and coatings products deal appetite in the £150m+ EV bracket, of the pound, and this is apparent in to the construction sector and North with Bain’s acquisition of MKM the only the building products sector. Whilst the America’s leading electrical raceway noteworthy transaction in this segment. proportion of international acquirers in manufacturer, Atkore International This is in stark contrast to 2015 when the sector during 2017 has remained Inc., acquiring Welsh-headquartered several larger deals took place, such as broadly similar with 2016 (c.29%), there Marco Cable Management, a designer Breedon’s £336m acquisition of Hope has been a considerable shift in the and manufacturer of wire basket cable Construction Materials (9.1x EBITDA) and geographic mix. The largest increase trays and PVC trunking, in order to US MRO giant W.W. Grainger’s £310m has been in US acquirers, buoyed by a further strengthen its UK and European acquisition of distributor Cromwell Group strong dollar, who in 2017 YTD account presence. The sharp increase in US (10.5x EBITDA). for 62.7% of all international acquirers, a purchasers has come at the expense of fourfold uplift compared to last year. EU acquirers – who accounted for just 22% of all international M&A so far in 2017, compared to 77% last year. Continued private equity appetite Private equity retains a steady interest Endless seized the opportunity to Group, a leading windows and doors in the sector, accounting for 29% of take control of one of Britain’s largest trade fabricator, for the acquisition of M&A activity so far in 2017. Bain Capital floorcoverings distributors, Carpet and Customade Group – creating a combined has high hopes for the UK’s housing Flooring Trading, which SIG deemed £100m revenue business with 10 market, evident from its acquisition of a to be non-core to its future plans. The manufacturing facilities across mainland significant minority stake in Hull-based c.£100m turnover business currently UK. MKM Building Supplies – the UK’s largest operates 12 sites across the country and independent builders’ merchant. MKM Endless has earmarked considerable We expect PE investors to be fully has performed exceptionally well under investment to support its future involved in several forthcoming sale previous owners 3i and LDC, having operational and commercial initiatives. processes, particularly non-core grown to 47 branches across the UK. divestments from large corporates, as MKM has a c.2% share of the overall Other notable private equity involvement well as maintaining a healthy interest builders’ merchants market and Bain in the sector includes Business Growth in businesses that have a disruptive intends to capitalise on this by expanding Fund’s investment in bathroom products business model – principally where the group, particularly to the south, group Ultra Finishing and Cairngorm online is leveraged as a key sales where it currently has a very limited Capital’s financing of Polyframe channel. presence. Comparable Transactions DATE TARGET ACTIVITY BUYER EV Jul-17 2iM International Industrial Metals Limited Provider of metals and roofing materials QRL Radiator Group n.d. Jun-17 Carlton Main Brickworks Limited Brick manufacturer Michelmersh Brick Holdings plc 30.6 Jun-17 TuffX Processed Glass Limited Manufacturer and supplier of reinforced glass Management Vehicle n.d. Jun-17 Mezzanine International Limited Designer and manufacturer of mezzanine floors MiTek Industries, Inc. n.d. May-17 Pro Mini Mix Concrete Mortars Concrete supplier Breedon Southern n.d. May-17 Stirling Lloyd Supplier of liquid waterproofing and coatings products GCP Applied Technologies 72.3 May-17 Marco Gearing Limited Designer and manufacturer of PVC trunking Atkore International Group Inc. n.d. May-17 Construction Materials Online Limited Construction materials supplier Key Capital Partners n.d. May-17 Olympic Fixing Products Limited Hardware products distributor PHD Equity Partners 6 Apr-17 Tool & Fastener Solutions Limited Distributor of air conditioning and refrigeration tools Travis Perkins plc n.d.