Back in Chicago, Edward Hines Lumber president Mac Hines echoes that sentiment, and offers fair warning to his larger pro dealer colleagues jumping into the market. “To wholesale buy in an entirely different geography just to make Pulte happy, I cannot fathom. That’s a lot of risk. Just because you are bigger does not mean that you are better,” Hines says. “The [companies that] can put the best people out there are ultimately going to be the most successful—that’s trite, but it is true.” Hines indicates that his company has no intention of selling, and in fact might make small purchases of its own in regions where it already has a compelling market presence.
While other stalwart independents in the industry undoubtedly share Hines’ sentiments, there doesn’t seem to be any shortage of “For Sale” signs at yards in virtually any market as dealers look to either cash out of the business or gain the capital scale to continue to grow. “With the backing of Lanoga and Fidelity, I think our future is very bright,” says F.E. Wheaton’s Brown. “We’re going to keep all of the benefits of a locally managed company yet have all of the resources of a large national player, so we’re very excited.”
With the level of competition between large national and regional pro dealers to acquire market share also likely to continue, even more deals are inevitably going to break throughout the course of 2006 and beyond. “I’m anticipating a busy year for us and a busy year for the industry in terms of M&A, as far as activity is concerned,” says Hord. “Hold on to your hats, because we’ve got a few more coming down the pike.”
Sidebar: Keeping Up As The Home Depot goes deep into new markets, pro dealers need to stay on their toes to track the big box’s moves and consider new growth avenues that will better position them for a market slowdown.
During 2005 the home building industry continued to expand and many companies benefited from the surge in both new construction and repair and remodel work; however, as we move through the second quarter of 2006, the industry seems poised to slow down and signs are beginning to emerge that the peak may have already occurred. With this picture as a backdrop, the financial community has begun to question where new growth will be found and what strategies are in place to cushion the slowdown. One way to illustrate this trend is to examine how The Home Depot, one of the largest and best-known participants in the building products industry, has adjusted to this changing environment.
As most people know, The Home Depot is one of the largest home improvement retailers in the world with annual sales in excess of $80 billion. Further, the company’s market capitalization is approximately $85 billion. The Home Depot was founded in 1978 and currently operates more than 2,000 locations. By any measure, The Home Depot is substantial, but even so, it has begun to address the question of what’s next. Specifically, it has adopted a strategy to enhance its core operations, extend its business, and expand its markets. This strategy has, in turn, translated into several recent acquisitions, including:
1. The September 2005 acquisition announcement of National Waterworks for $1.35 billion. Shortly thereafter, in January, the company announced the acquisition of Hughes Supply for $3.2 billion. Both National Waterworks and Hughes Supply serve the maintenance, repair, and operations segment by distributing a full line of pipes, fittings, valves, meters, fire hydrants, service and repair products, and other components that are used to transport water to and from residential and commercial locations.
Although some industry pundits have questioned the rationale for these large acquisitions in a seemingly unrelated business, it is simply a result of The Home Depot’s game plan of expanding its customer base outside of its traditional DIY model. It should be noted that members of management from both National Waterworks and Hughes Supply are staying with The Home Depot. The takeaway from these transactions is the need to find new markets and customers is critical so long as sufficient diligence has taken place and management is on board to run the new business.
2. Prior to the acquisition of National Waterworks, The Home Depot made a significant statement regarding its continued interest in the professional supply sector with its purchase of Williams Bros. Lumber Co. and Contractors’ Warehouse, both in June 2005. Williams Bros. operates 16 locations throughout Georgia and sells exclusively to pros. In addition, the company maintains a construction services division that furnishes materials for turnkey applications, eight I-Joist design and production facilities, and four truss plants. This acquisition is likely a first step toward greater activity in this area as it fits The Home Depot’s strategy of market and customer growth in addition to positioning the company in the lucrative value-added fabrication arena.
3. Finally, The Home Depot has made a number of acquisitions in the service segment, such as Creative Touch Interiors, RMA Home Services, and Installed Products USA. These transactions taken individually have not been sizable, but as a whole they do indicate a trend that will likely continue into the future. Combined with The Home Depot’s existing store portfolio, the ability to drive synergies with these types of service providers appears to be strong. Further, as these businesses generally are not very asset intensive, they have the potential to generate high returns on investment, a desirable attribute of any acquisition.
No doubt, both the home building and the repair and remodel sectors have enjoyed tremendous growth over the past several years. Whether this trend will continue throughout 2006 is unclear, but a slowdown is ultimately inevitable. Major players like The Home Depot have already begun to position themselves for change by expanding into new markets, targeting new customers, and adding both manufacturing capabilities as well as installation services to enhance margins and drive growth. This formula not only works for the Goliaths, but also for the Davids in the industry, and the timing is probably opportune for dealers of all sizes to begin this type of review. —Nicholas V. Beare is managing director of Stephens Inc.
