Volume 14, Issue 7- September 2013


Going Public
Examining IPO Activity in the Window Industry
by Michael Collins


The recovery has prompted two window companies to approach the public market with their shares. In July, Associated Materials filed for a $100 million initial public offering (IPO), which had not yet been completed as of press time. The Ply Gem IPO, in May of this year, was met with strong buyer interest. This pushed the final IPO share price over its expected range and made Ply Gem (NASDAQ: PGEM) the most recent publicly traded window company. PGT Inc. (NASDAQ: PGTI) was previously the only publicly traded pure play window maker in the U.S. Ply Gemís sales include revenue from siding and other products, in addition to doors and windows. However, their more national coverage makes Ply Gemís financial performance, in many ways, a better proxy for the performance of the national window market.

Analyzing EBITD
A Public filings show Ply Gemís revenues to be $1.14 billion, with $120 million in accompanying earnings before interest, taxes, depreciation and amortization (EBITDA). This means Ply Gemís EBITDA margin (calculated as EBITDA divided by revenues) is roughly 10.5 percent. In other words, it exceeds the 10 percent rule of thumb that indicates a well-run door and window company. Companies with EBITDA margins at this level typically sell differentiated products that do not compete primarily on price. As a company gets larger, it becomes more difficult to achieve above average profitability. Large companies find they must capture market share from others, often using price reductions to dislodge entrenched competitors. In Ply Gemís case, whatever they have done to grow over time, a 10.5 percent EBITDA margin says that they have done it in a smart way, despite their size.

On the flip side, privately held companies tend to receive a discounted valuation because of the lack of liquidity of their shares. While shares of a publicly held company can be sold at any time during market hours, the sale of privately held companies requires a time consuming process. The shareholder agreement may even prohibit minority shareholders from selling their shares unless the primary owner also does so. There are a number of factors that influence the EBITDA multiple that should be applied to a given company. While this public information does not provide a perfect proxy, it is information that can be interesting to factor into valuing a private door or window company.

Is it Good News?
In general, what does it mean when companies begin to undertake IPOs in a given industry? It might seem to be a positive indicator for the industry, since investors are gobbling up shares. However, the seller of those shares is the group that knows more about the company and its future prospects than anyone. And theyíre selling. As often as not, a rash of IPOs can mark the top for an industry. However, we think these recent IPOs are an exception. Both Associated Materials and Ply Gem are controlled by private equity (PE) funds. When a PE fund buys a company, one thing is virtually certain Ė at some point in the future, that fund will sell that company to someone else. Thus, these IPOs appear to be very elegant solutions for groups that needed liquidity in two hefty holdings. The door and window industry is large but there are few industry participants with a checkbook large enough to buy companies of this size. By undertaking IPOs, companies are able to sell the desired portion of their shares to a wide array of institutional and individual investors, avoiding the risk of pursuing a transaction with a single large buyer.

We recommend viewing these IPOs as a good sign for the industry, one that brings with it interesting financial information from public filings. Companies wishing to benchmark their financial performance against that of larger competitors will find these IPOs to be the source of valuable and useful information. Also, the financial success of these companies is further indication that the recovery is in full swing.

Michael Collins is an investment banker and a partner in Building Industry Advisors. He specializes in mergers and acquisitions in the door and window industry.


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