Volume 13, Issue 8 - October 2012

TrendTracker

Capital Markets Improving
Welcome News for Door and Window Manufacturers
by Michael Collins
mcollins@jordanknauff.com

The key statistics measuring the health of the housing industry are exhibiting increasingly positive trends on a more consistent basis.

Banks Lend Again
Many groups make judgments regarding industries based on a macroeconomic view of where a given industry sits in the business cycle. During the housing bust, for example, even financially sound companies with continuing, albeit reduced, profitability found their access to capital diminished. Now, door and window companies that work with large national and regional banks report that their relationship with their bank has improved significantly. Banks are more willing to extend credit and even support undertakings such as acquisitions that, until recently, had received a cold shoulder. During the bust period, numerous lenders reached out to us to inquire as to the value or salability of lending clients of theirs. Other business owners contacted us after being compelled by their lenders to explore the option of a sale as a means of closing out the loan. These calls have essentially stopped, indicating the improving overall conditions in the market.

Even companies that lack a pristine balance sheet are finding additional flexibility in this improving capital environment. Companies that wish to ensure that their current capital provider is willing and able to help them take advantage of improving conditions should consider a three-step process.

First, they should consider whether to exchange a reasonably priced but reluctant lender with a more expensive but more willing lender. That should allow the company to undertake, as a second step, the needed growth initiatives in order to capitalize on the improving market. The final step, after the company’s growth plans have manifested themselves in an improved bottom line, is to exchange their expensive but willing lender with a reasonably priced and willing lender. This transition may take two years but it can leave the company in a much better position than staying with a lender who is riding with one foot on the brakes at all times.

Another aspect of the improving industry is the uptick in interest in management buyouts (MBOs). Business owners appreciate the chance to sell their company to their management team and, typically, the private equity fund backing management. It represents a way to reward the management team for their work in building the company and the owner can rest assured that the company is in capable hands. Customers are seldom concerned about continuity in these transactions, since the management team is largely staying in place. Also, it is virtually certain in such a transaction that the manufacturing facility will not be closed down or consolidated with another operation. Those on the management team can fare very well financially in an MBO and are often the perfect age to push hard on growing the company for five to seven years before providing themselves and their private equity (PE) backers with a big payday at the eventual sale of the company.

Companies Invest Again
The inquiries we receive from companies seeking to place debt or equity capital in or acquire door and window manufacturers and other building products companies are increasing. These groups believe that we have arrived at the appropriate spot on the upward curve of the market to place their bets. They seek to buy into the last bit of market weakness and, in the future, sell into the full momentum of recovered market strength. Running counter to this trend is a relatively tight supply of quality companies. Most door and window manufacturers have taken the required steps to restore profitability and their numbers are on their way back to pre-bust levels. Many of the owners of these companies wish to see more improvement before selling. This relative tightness in supply, combined with an increasing interest in the space by capital providers, makes this an ideal time for door and window manufacturers to approach the market with a debt or equity capital placement or a business sale.

Michael Collins is an investment banker and a partner of Building Industry Advisors. He specializes in mergers and acquisitions in the door and window industry.


DWM

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