July 6th, 2010
What Recent Acquisitions Mean for the Industry
A spate of recent transactions, along with several others that are progressing toward completion, has helped bring the number of door and window merger and acquisition transactions closer to our previous expectations. The most recent is the acquisition of Loewen by VKR Holding of Denmark, the parent company of Velux Skylights. This purchase was a logical follow-on to the acquisition by VKR of the Gienow Group’s Alberta operations in late 2009. At that time, VKR referred to Gienow as a “platform” in the Canadian market, clearly indicating their intention to make additional acquisitions. This acquisition makes sense, given Loewen’s focus on products for the higher priced end of the market, traditionally the source of higher margins for manufacturers. Also, Loewen extends VKR’s geographic footprint in Canada.
In our view, every acquisition sends a signal about the buyer’s opinion of the market. The recent acquisition of TRACO by Alcoa is a statement of belief that the commercial sector will recover. Masonite recently announced that it has acquired two door manufacturers in India, with a third to be acquired soon. The most interesting takeaway from these acquisitions, in my opinion, was that Masonite’s primary intention regarding these companies appears to be serving the domestic Indian market, rather than exporting low-cost products to the United States. That may become an ancillary benefit in the future, but for now Masonite appears to be positioning itself to capitalize on the presumably higher growth rates in India. This strategy bears out our prior statements that U.S.-based manufacturers can, with a sufficient investment, successfully manufacture doors and windows overseas for consumption in those local markets.
The signals sent by the acquisition of Loewen include a vote of confidence for the high-end and residential segments. The most important signal, though, is the likely increase in the tempo of the consolidation of the Canadian door and window market. Indeed, we’re in touch with numerous manufacturers in Canada and the states that lie along the border that have acquisition appetites for Canadian door and window manufacturers. Since the Canadian banking market is more conservative than that in the U.S., the Canadian real estate market is less subject to bubbles. This makes buying Canadian companies an attractive risk-reduction diversification strategy for U.S.-based companies. This and other factors will likely lead to an increase in the number of acquisitions of Canadian manufacturers in the next one to three years.