Green construction trend slow to translate into M&A, industry sources suggest21 August 2008

The US construction industry is experiencing what looks like a groundswell of interest in more environmentally friendly, or "green", materials and processes. However, sources in the green building materials space say the interest has been slow to translate into M&A activity or anything like it.
While it could seem attractive for large, traditional building materials suppliers to acquire the niche, green product innovators in the market, industry sources indicate that they have not seen much momentum toward such acquisitions. They suggest the obstacles to M&A could include the generally difficult construction market, a skepticism about the profitability of green products and the difficulty in defining what really counts as green.
Listed Trex Company (NYSE: TWP), for example, is hearing more interest from analysts and industry observers related to its use of 100% recycled materials in making composite boards for fences and decks. But the interest in Trex's green processes has not brought direct approaches by would-be acquirers, said Ron Kaplan, chief executive at Trex, based in Winchester, Virginia. He added that he doubts whether many construction executives are seriously pursuing M&A in this difficult market cycle, particularly among companies active in the homebuilding arena.
Kaplan was mum on whether such a sale could be part of Trex's future strategy, saying only that he was hired to focus on improving profit margins. In the past year, careful purchasing of recycled polyethylene helped the company achieve savings in its material costs, while the price that its competitors paid for virgin polyethylene increased 35% to 40%. The company has a market cap of USD 300m and 2007 sales of about USD 330m.
At West Trenton, New Jersey-based Homasote (PINK: HMTC), chief executive Warren Flicker has actually noticed a recent decrease in the frequency of calls from interested M&A partners, despite the company's apparent green appeal. The company has been making a construction fiberboard from recycled newsprint and related materials for several decades, and Flicker expects to see strong sales growth ahead.
While the listed (though tightly held) Homasote could be an attractive tuck-in target at USD 20m to 25m in annual sales, Flicker said the wood product makers he would normally think of as buyers have not shown themselves to be too acquisitive lately. He mentioned listed Weyerhaeuser (NYSE: WY) and privately held Georgia-Pacific as examples.
In the lumber industry, one executive described the green movement's sustainable forestry certification as "a lot of sizzle and not much steak." He has gotten his products certified by the Forestry Stewardship Council, which indicates that the lumber comes from sustainably managed forests, but the efforts do not seem to be paying off in terms of more business or better profits, he said. While a small consumer segment is interested in green products, the broader construction industry is not focused on them, he observed.
A second lumber executive involved in the green movement was more optimistic, saying that right now green seems like a small percentage of the market, but it has the potential to grow dot-com style. He said it has long-term implications as green becomes a lifestyle change for more people, and further added that it is seen as a fresh and cutting edge addition to the industry.
The first lumber executive suggested that eventually government regulations will require sustainable forestry practices across the board, making it irrelevant which companies made the initial efforts in the green movement.
All so-called green products are not created equal, added a spokesperson for listed Nashville, Tennessee-based Louisiana-Pacific (NYSE: LPX). Products that provide improved energy efficiency are the most in-demand green products, she said, because they carry with them a measurable return on investment for the end users. However, construction contractors are not eager to pay more for products that are made from recycled materials or sustainably grown timber, if they do not provide obvious performance advantages. The spokesperson could not say whether LP might target niche green product makers for acquisitions.
Tim Faust, a partner with MagBoard and sister company MagWall, says he has had some luck with attracting investors to green building materials. He sold a stake in privately held MagBoard, which manufactures a magnesium-oxide construction board, to Johns Manville (a Berkshire Hathaway company) and privately held IIG (Industrial Insulation Group).
Faust is hopeful that MagWall will grow into the bigger of the two enterprises, by incorporating MagBoard's products into a structural insulated panel that he says will provide greater fire resistance, structural strength and energy efficiency to buildings. Its green appeal is that magnesium oxide is a commonly available mineral -- therefore considered sustainable -- and the manufacturing process requires no heating of the materials, so it does not create significant pollution. He said he expects an IPO to provide the best value for MagWall in the future, although he did not rule out a sale and said the company will be attractive to suitors. He is optimistic that MagWall could grow into a USD 100m valuation with the next year or less.
At least one company has expressed recent interest in green building product acquisitions. An insider at listed, Irish-based Kingspan recently told this news service that the company was eager to acquire insulation and renewable-energy-related product makers in the US and Western Europe, as it expects rising energy costs and increasing government regulations to boost the demand for those items.

by Chris Marr in Atlanta and Karen Schwartz in New York

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