Glazing Sector Acquisitions Could Be Unsustainable

The current trend of acquisitions in the glazing industry makes for easy page views. They’re generally always a big deal, especially if they’re a surprise, and we are seeing an industry in flux as it grapples with itself and tries to figure out what shape and size it needs to be.

But in all of the excitement and press releases I believe we are missing something quite important. As nice as it would be to think that free cash would have got the job done, a lot of these industry acquisitions will be financed by debt. Borrowed money. It’s never been as cheap as it is now to borrow money, whether it’s in small or very large amounts.

And herein lies the problem. With interests rates as low as they’re every likely to go, it will only take a small nudge upwards to push the cost of that debt quite a lot higher. This would be very problematic for those paying for the acquisitions.

Risk of collapse

Right now Bank of England interest rates are 0.25%. That’s not what clients lending from banks will pay, it’s usually a couple of percent higher than that. Still, it’s as cheap as it has ever been. Which means a company or VC buying a fenestration business can borrow tens of millions of pounds at record low rates. Perhaps only a couple of percent above the BoE base rate. This also means very low interest payments on that investment. Good for the people or companies doing the buying.

However, there are risks that are closer to home that could put a rather large spanner in the works. Inflation being one of them. In not such a short space of time we have seen deflation to inflation to 1.8% with figures just announced. This has been caused by the fall in the price of Sterling and the steady rise of oil prices. Rising inflation is one of the primary causes of interest rate rises. The Bank of England raises rates in an attempt to stem the rise in inflation if it looks like it could become out of control.

Inflation is forecast to rise above 3%, which is 1% above the Government’s target of 2%. A target seen as sustainable for the economy. However, if inflation rises much beyond that, there will be pressure on the BoE to raise rates to combat it. This is where the risk sets in on our industry’s acquisitions.

If acquisitions have been agreed on debt deals with variable interest rates, then it’s going to sting. Suddenly, the relatively low interest payments on that debt become bigger. If inflation rises quicker than previously thought, interest rates may do the same. Out of nowhere, servicing the debt taken on to buy a business becomes costlier.

Combine with a slowdown

Inflation has a secondary consequence, and that is to curb spending by home owners and knocking consumer confidence. Something that our industry relies on. Should home owners decide to reign in spending, even just a little bit, this would create a slow down in the economy that will put pressure on the businesses that have been bought and everyone else.

The pressures on a business that have just been bought are more acute than those who are happy doing their own thing. The other company or investor expects return on their money. Meaning they want their money back and more during their period of ownership. But, if the cost to service the debt used to buy the company rises quickly and is double-teamed by a slowdown which hits sales, then that acquisition starts to look very fragile very quickly.

It’s not too dissimilar a scenario that caused the sub-prime mortgage crisis which was the cause of the Lehman Brothers collapse. In that bubble, money was lent to people who in the long term could no afford to pay it back. The problems came home to roost when a slowing economy set in and interest rates caused mortgage payments on their properties to become un-affordable. The economic outlook is showing some similarities as back then. For me, these deals may not be on as sound a footing as it will be made out to be.

A time to galvanise

Fate is by no means a foregone conclusion, and we are all certainly in control of what we can do about what may be ahead. The people and organisations who have spent their money buying up the industry’s window and door companies have a very sharp focus in making sure their investments pay off. In other words, making sure the glazing industry businesses they’ve bought remain successful.

Therefore, the uncertainty coming up is likely to be a spur for those acquiring and those who have been acquired. They simply cannot afford to sit back and be given a bloody nose by rising inflation and a risk of slowing home owner spending. If we want to continue the growth the window and door sector has enjoyed since the Great Recession then we’re all going to have to become active, reactive and forward thinking. But the ones at risk the most may well be the businesses that have been bought, because of of what I covered in my post earlier. It if quite feasible that if all the winds blow in the same direction, deals could collapse.

I would also urge the re-thinking of price increases. I fully understand that the cost of the raw materials needed to make windows and doors have risen recently. But we have to take into account what may be to come. Inflation is going to squeeze home owner spending power. That is a reality we have to remember. It means big ticket items, like new windows and doors, slip further down the list of things to do. And if interest rates rise even by a medium amount, the credit market may not be as helpful to people if they want to finance home improvements. The best thing we can do as an industry is to keep our prices as affordable as possible, whilst maintaining a profit.

If we as an industry start to pass down each and every increase in full to home owners, we can fully expect sales of window and door products to slide quite quickly. There is a tricky balance to strike and we’re going to have to find it now. There are bumps coming that we cannot avoid. How we decide to handle them will decide whether we ride them out safely or whether some of us come of the track. For me, the ones at risk the most right now are those in the M&A market.

It is a fascinating, enthralling time to be in our industry right now. A period of flux, change, competition and uncertainty that we rarely see. Cool heads and steady hands will be a useful skill set to own.