Volume 11, Issue 8 - October 2010

Trend Tracker

Keeping an Eye on Canada
by Michael Collins

A recent trip to Canada to visit with several window manufacturers sharpened our focus on the Canadian door and window market and highlighted several interesting differences between that market and the United States. We have also noted the recent uptick in door and window merger and acquisition activity in Canada, leading us to further investigate the ease of approaching the Canadian market. This neighboring market is an area every United States-based door and window manufacturer of size should consider entering directly or through acquisition.

Turning a Profit
All the companies with which we met in Canada were profitable, some very strongly so. This contrasts with many companies in the United States that are still cutting costs in a lower revenue, lower earnings environment. The owners of these Canadian companies shared that they regretted not seeing a strong surge in housing in Canada as was seen in the United States in the early to mid-2000s. However, now that they have seen the spectacular blow-up in our housing market, they all believe that slow and steady is likely better for a market in the long run. Indeed, Moody’s estimates that home prices in the U.S. dropped roughly 30 to 40 percent from peak to trough. In Canada, meanwhile, TD Economics estimates that housing prices suffered only a 9 to 12 percent decrease. Most of the companies credited Canada’s conservative lending practices for helping avoid a housing bubble there.

A Market Worth Entering
Despite the stability of Canada’s housing market, a skeptic might wonder whether it is worth attempting to enter or serve a market, roughly equal in land area to our own, with just more than one-tenth of the 307 million people that the Census Bureau estimates reside in this country. Canada’s 33.5 million person population falls three million short of the population of California. At first glance, Canada appears to be a thinly populated and difficult market to serve. However, according to Statistics Canada, roughly 80 percent of the Canadian population lives in urban settings. The 20 largest cities alone are home to almost 60 percent of all Canadians. Thus, it would be relatively easy to establish operations or make acquisitions sufficient to serve the majority of the Canadian market.

"All the companies with which we met in Canada were profitable, some very strongly so. This contrasts with many companies in the United States that are still cutting costs in a lower revenue, lower earnings environment."

Analyzing past housing starts in Canada, as published by the Canada Mortgage and Housing Corp., we see that there were some 1.9 million housing starts in Canada between 1980 and 1990. Home to 60 percent of the population, this would indicate that the 20 largest cities may have as many as 1.14 million houses between 20 and 30 years old. Most of these homes are likely in need of replacement of external building products, such as doors and windows.

In addition to being a prosperous market with enough critical mass to be attractive, an expansion into or acquisition of a company in Canada provides a valuable hedge against United States-based revenues. While the markets are located very near one another, the events of the past several years have proven that the two countries’ economies do not move in lockstep. The Canadian market benefited from an energy efficiency tax credit similar to our own. While the Canadian tax credit is now gone, the Canadian market was performing well prior to the credit and is likely to continue to perform well now that it has ended.

Also, being located near ample sources of lumber, owning a Canadian company could provide synergies in the purchase of wood for doors and windows. Finally, a presence in the Canadian market, if executed through the purchase of a Canadian manufacturer, could provide opportunities for both companies to cross-sell their products to one another’s customer base. As with any strategy for growth, it is important to make sure the new strategy is a fit with other existing strategies from a risk and return profile.

Michael Collins is vice president of the building products group at Jordan, Knauff & Company, an investment banking firm that specializes in the door and window industry. He may be reached at mcollins@jordanknauff.com. His opinions are solely his own and not necessarily those of this magazine.


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