Venture capitalists may be looking this way - at last!

Home Channel News, Oct 23, 2000 by John Caulfield

On Aug. 14, Premier Construction Products Statutory Trust, an affiliate of a little-known investment company called Integrated Capital Group, agreed to pay $19 per share, or around $410 million with the assumption of debt, to acquire the Kansas-based Republic Group, whose businesses include the gypsum wallboard supplier Republic Gypsum.

Less than a month later, billionaire investor Warren Buffett's high-flying Berkshire Hathaway agreed to shell out $19 per share to acquire between 80 percent and 86 percent of Shaw Industries, the largest carpet manufacturer in the United States. In August, Berkshire had completed a $600 million deal to acquire Justin Industries, whose assets include Acme Brick, a leading supplier of bricks, concrete masonry and ceramic tile.

The prices paid for these companies represented sizable premiums over the amount at which each company's stock had been trading. More to the point, private equity investors are suddenly pouring money into this industry to exploit the undervaluation of public companies. This is a stunning reversal of the less-than-enthusiastic attitude investors had taken towards the industry until a few years ago.

"The amount of private equity capital that has been amassed for investment is well north of $50 billion, and I fully expect investors to be taking more public companies private," said Adam Reeder, managing director and head of the construction and home-building group at UBS Warburg, a New York-based investment bank. Reeder believes that "virtually all sectors" within the building materials industry potentially are open to this kind of investment activity, even the giant, publicly-owned manufacturers thought to be untouchable in the past. "There are limits, but those limits are greater than ever, especially with private equity firms partnering" to increase their buying power.

A case in point is the recent $2.85 billion acquisition of Johns Manville. The investment group that bought Manville's stock includes the brokerage Bears, Steams and the Dallas-based leveraged buyout firm Hicks, Muse, Tate & Furst, whose varied interests include Clear Channel Communications, Regal Cinemas and, through its Olympus Real Estate affiliate, MH2Technologies, the business-to-business platform developed by Michael Holligan Homes.

"This is still a highly fragmented industry, and investors see opportunities to consolidate the business with the aid of Internet-based technologies," explained Kevin O'Meara, the chief financial officer for Builders FirstSource, itself a creation of an investment consortium, that has been doing some aggressive consolidating of building materials retailers in recent years. O'Meara noted that in most building product sectors, "you have to watch capacity, and the best way to manage that capacity is through consolidation."

What this infusion of private equity capital will mean for this industry at large, to say nothing of the companies being acquired, has yet to be determined. Reeder pointed out that private investors are often more interested in gaining control of the businesses they acquire than in reaping the benefits associated with moving in and out of publicly-traded stocks.

But O'Meara, who once worked for Hicks Muse, cautioned against drawing broader inferences from these mergers and acquisitions. He pointed out, for example, that his former employer also controls a holding company that owns Gemini Software and Falcon Building Products, but that didn't mean there automatically would be synergies between those assets, MH2 or Manville.

At least for now, the residential and commercial building and remodeling market may simply look a lot less shaky to investors than some of the e-commerce enterprises they've lost bushels full of money on. Indeed, more than a few analysts suggested that Buffett's investment in Shaw has "validated" the entire industry's long-range growth prospects. However, at press time Bear, Stearns and Hicks Muse were having trouble raising the capital needed to pay for Manville owing the supplier's anticipated weak earnings in the third quarter. Barron's even raised the spectre that the Manville deal -- $2.35 billion of which is new debt -- may not come off at all. And the decision by fledgling hardware-store retailer Stambaugh Hardware to file Chapter 11 and to liquidate its assets was made largely because the private investment capital it needed to achieve "profit maturity" had dried up.

It appears that "validation" remains in the eye of the investor.