The LBM industry woke up Aug. 27 to the biggest deal ever in construction supply: The merger of America's two biggest lumberyards, Builders FirstSource (BFS) and BMC. The resulting $11.2bln behemoth will employ 26,000 employees in 550 locations across 42 states from Florida to Alaska. The combined company, which will carry the BFS name but have BMC's Dave Flitman as its CEO, will serve 44 of the nation's 50 biggest metro areas. The all-stock transaction likely will close late this year or early in 2021.
BFS CEO Chad Crow called it "a transformational opportunity to create the nation’s premier supplier of building materials and services." Flitman used the same words. The stock market clearly loved the news: BFS' shares rose 8.35% yesterday. But how transformational will this deal be to you? What threats and opportunities does this merger pose to the new company's competitors? Its vendors? Its current employees? Here are my initial conclusions.
Some Yards in Select Markets Will Close
The merger's authors predict a united BFS will be able to cut costs by $130mln to $150mln a year in the first three years by rationalizing suppliers, overhead expenses, and facilities. Let's look first at the impact on facilities. Shown above, Webb Analytics' nationwide map of BFS locations (red pins) and BMC yards (blue) tends to favor just one color in most parts of the nation. (Not shown is Alaska, where BFS has yards but BMC doesn't, or Hawaii, where neither company has facilities). But when you drill down on the continental U.S. map, you can see places where overlaps occur. For example, here's what you'll find in Texas:
You can see more of these maps in this Webb Analytics report. In it, I identify these markets as being most likely to have yards that could be shuttered:
Charlotte and the Triad and Triangle regions of North Carolina
Colorado's Front Range
Utah's Salt Lake Valley
Metro Atlanta
Coastal Georgia and South Carolina
Dallas-Fort Worth, San Antonio-Austin, and Houston, TX
In an analysts' call shortly after the Aug. 27 announcement, Crow said a lot of work remains in deciding which yards might be shuttered. "Most of that overlap is going to be in the larger MSAs where there’s a lot of building activity," Crow said, "so yes, there will be some, but there won’t be any that will reduce our capacity in any way. … We may have a facility with rail where they don’t where we’ve go the excess capacity or vice versa. So there’s a lot of work yet to do on that.” Flitman noted some yards near each other might both stay open if they are complementary. "Obviously, in Texas, we have a lot of overlap. But we have very strong capabilities on the manufactured side, on the millwork side," he said. "I think the majority of this [decision-making] will play out, as I said in my comments, to help us further accelerate growth and make sure, on a local market basis, we have the capability to supply the needs that our customers have.”
Image taken from the BFS-BMC analysts presentation
Some Staff Will Go. Others Will Want to Leave
Obviously, a merged company doesn't need two of everything. Neither can the merged company succeed solely using one side's work force. So it's likely that some back-office people will be designated as surplus to requirements. That identification process has only just begun. What to do with OSRs will be trickier. Differences between BFS' and BMC's commission structures will need to be smoothed out, and what results could inspire some sales reps to leave. Others will chafe at having new bosses, or new offices to report to, and thus will find alluring offers from competing dealers to change teams. This also will take time to work out. Page 78 of the merger agreement contains language that, to this non-lawyer's eyes, appears to guarantee for one year that employees' annual base salaries, target cash bonuses, and certain benefits cannot "in the aggregate" be made "less favorable" than what they now get. Then there's COVID. This year's move toward videoconferencing and away from face-to-face meetings is changing the sales process. BFS and BMC both are huge believers in technology, so it wouldn't be surprising to see them invest even more in e-commerce innovations, promoting transactions that could supplant belly-to-belly sales techniques. Expect Sales to Focus on Value-Add Products for the Top Builders
Officials for both companies highlighted to analysts how 43% of what they sell consists of value-added products like trusses, millwork, doors, and windows.
Image from the analysts' presentation
Investments in these areas will increase, they said, and it was easy to see who they were trying to appeal to: big builders in the Sunbelt. "We will significantly improve our ability to service key high-growth markets in the South, Southeast and West regions, which represent over three-quarters of U.S. single-family housing starts and more than 85% of our combined revenues," Flitman said. "I get really excited about things like penetrating our Ready Frame offering across the combined companies, the strengths that Builders has had for a long time in manufactured components and structural components," Flitman added later. "As you’ve heard us say, there’s still a lot of opportunity for penetration in the market for those combined offerings. And one of the things I get really excited about is that we’ve had our footprint in 18 states to this point, but we always haven’t had the capability we needed to serve large national builders in a consistent fashion across that footprint. This solves that problem for us in a big way, and I think we’re really excited about growth. I think the combined company will be eager to engage around that and talk with our customers about how we can better serve their needs going forward.”
Expect Renegotiations with Suppliers
The 34% of savings expected to come from procurement amounts to as much as $51 million less money going to suppliers. During the analysts' call, BFS and BMC executives were cagy with regard to how they expect to make those cuts. For instance, rather than talk about haggling with vendors, BFS SVP & CFO Peter Jackson cited purchases of safety equipment. "Whether it be COVID or just day-to-day gloves, doing that on a consolidated basis nationally puts us in a position to get better pricing on each one of those," said Jackson, who will remain in the CFO role after the merger. "There’s a lot of categories of indirect spend," Crow added. "You spread those across 550 locations and small savings can become a real meaningful number pretty quick." The new BFS won't necessarily be spending less on a per-item basis, however. Instead, vendors and BFS might opt for higher back-end rebates.
The Urge to Acquire May Slow for a While Wall Street expects growth. Recently, BFS and BMC have done that via acquisitions. In fact, both would have suffered declines in net sales in the second quarter from the year earlier had it not been for revenues they got from acquisitions in 2019. During analysts' calls to release second-quarter results, executives from both firms said they're ready to get back to buying companies now that they've passed through a hunker-down period prompted by the pandemic. But on Thursday's call to announce the deal, Flitman declined to say the new BFS will remain a buyer. "The strength of the balance sheet of the combined company gives us a lot of flexibility for capital allocation going forward," he said. "And I think you’ve seen both companies invest internally is the highest priority." Soon after, Jackson was asked whether it made more sense to invest in expanding BMC's Ready-Frame system to BFS clients than it was to buy companies. Instead, he talked about the free cash flow the merger will produce.
"The world is our oyster in terms of how we'll use that cash," he said.
Image taken from the BFS-BMC presentation to analysts
Why Do It? Because Bigger Is Better ...and to Boost EBITDA
You could say that the BFS-BMC merger represents the culmination of roll-up fever that has swept through LBM since nearly the start of this century. The two entities combining now come from scores of formerly independent operations that were taken over. Former ProSales editor Greg Brooks likes to question whether any operation ever taken over has come out of it better and more individually profitable than it was before being bought. In this case, the new BFS looks likely to be able to meet the needs of big builders in ways that BFS and BMC couldn't do individually.
And if the numbers people are right, the deal will boost EBITDA (earnings before interest, taxes, depreciation, and amortization) by roughly a full percentage point above what either company has been able to do on its own. Currently, among the publicly traded companies, only drywall specialists like GMS and Foundation Building Materials get those numbers.
The Merged Company Is Way Ahead of Its Peers, But Still Only #2 Overall in a Fragmented Market
To put the BFS-BMC deal into perspective, here's how the latest ProSales 100 rankings look. They're based on sales from 2019.
Combine the BFS and BMC numbers and you get a company that's three times bigger than its nearest lumber-based rivals, 84 Lumber and US LBM, and seven times bigger than Carter Lumber. But even with that added bulk, the new BFS will remain smaller than roofing specialist ABC Supply:
"I think, combined, we’ll have something in the high single digits market share in this industry," Flitman told analysts. He said that "just points out and underscores the point that we’ve made throughout the morning here: that this is still an extremely fragmented industry, and our customers have plenty of choice in local markets." Hmmm ... That suggests even more mergers are likely to take place. Stay tuned.