MERGERS & ACQUISITIONS – TSP
PE Firms Target Construction Suppliers in Southeast, Rockies
October 11, 2023
Paul Elias
Drawn to the industry’s high cashflow and low-risk assets, PE firms are snapping up construction material suppliers in business-friendly regions of the country, including the Southeast and the Rocky Mountains, in a trend that experts say has legs.
Material distributors in the construction industry are a growing target for middle-market funds, who are buying up companies in regions undergoing or expected to experience a building boom.
“It’s definitely a hot sector,” says Daniel Schlacter, an accountant with Cincinnati accounting firm Barnes Dennig.
Cash is King
Schlacter says PE firms are drawn to wholesale distributors because they typically have high cashflow, which immediately helps service the debt used for acquisitions. Their assets, too, are viewed as lower risk than highly specialized fixed assets.
PE firms are particularly looking at the Southeast and the Rocky Mountains region in and around Denver. Attracted by low taxes, fewer regulations and a non-union workforce, companies are moving their operations there, including electric vehicle makers and other companies building manufacturing plants in the business-friendly Southern states.
Armada Business Materials was recently created and launched in October by Tampa, Fla.-based Kelso & Co. and other investors to serve these regions. Kelso says it plans to expand Armada through strategic acquisitions of construction materials companies in growing regions of the country. Armada’s first purchase: Volunteer Materials, a crushed stone supplier in Lewisburg, Tenn. Armada serves the greater Nashville area, which is undergoing a building boom along with much of the south. Lower taxes, warm weather and a lower cost of living are driving population growth.
“Volunteer is an ideal first platform for Armada with key locations in Tennessee positioned for further growth,” says Armada co-founder and chief executive Rob Stone.
Westward Ho
Slate Capital Group used the same logic with its acquisition of Spokane, Wash.-based Tombari Structural Products to add to its portfolio company O’Donnell Metal Deck. Tombari’s aggressive growth east through Utah, western Montana and into the fast-growing Rocky Mountains made it an attractive target for expanding Baltimore-based O’Donnell’s westward reach, Slate partner Rick Corcoran says.
“That whole western region, broadly, is very attractive,” Corcoran says. “It’s a giant, giant market.”
The Kenan Institute of Private Enterprise, a nonprofit thinktank in Chapel Hill, N.C. reported last year that Denver’s economy is the sixth-fastest growing in the United States, just ahead of Salt Lake City, two of Tombari’s key customer bases.
Corcoran also says Tombari is a well-run, profitable company, making it an even more attractive target in a tough overall M&A market.
Mike Tombari took over the company from his parents in 2015 and says annual revenues grew from $30 million to $140 million in a business that has about a dozen employees. Tombari is staying on as president.
He and his parents decided to sell last year, as dealmaking was heading into one of its most difficult periods. They hired Capstone Partners to advise.
“There’s always a deal for high-performing companies,” Tombari says.
In fact, says Randal Stephenson, head of investment banking at FE International, it’s transactions in the lower-middle market and middle market in general that will help lift dealmaking from the trough.
“Like ‘the Little Engine That Could,’ small companies chug along and produce cashflow, perhaps not spectacularly or with enormous impact,” Stephenson says. “But more dependably than huge, complex transactions held together with bubble gum and bailing wire and fragile financing pricing, terms and structures waiting to fail.”
Connect to construction supply dealmakers:
Corocoran: rjc@slatecap.com
Armada: Acquisitions@armadamaterials.com