After a robust 2021 and the first half of 2022, mergers and acquisitions (M&A) activity in the flooring sector began to fall off in the fourth quarter, even as negotiations that started earlier in the year finally closed.
From a performance perspective, 2022 headline revenues masked mixed environment. While revenues were up across the board, this was largely a price story, as volumes inched up only 1% in 2022.
Heading into 2023, the flooring industry has started preparing itself for an anticipated revenue drop during the year’s first half. Still, some bright spots could help bridge the gap to the end of the year before an anticipated strong rebound in 2024.
Notable M&A Deals and 2022 Performance
In October 2022, Crown Products Inc., a flooring and installation products distributor based in Bloomington, Minnesota, announced the acquisition of All Tile Carpet Cushions & Supplies. This deal marked a consolidation of the Midwest wholesale distribution space and was one of the most significant top 25 redistribution deals the flooring industry has seen in a while.
October included another significant deal, as Belknap-Haines completed its acquisition of Houston-based STC (formerly Swiff-Train), a top 20 distributor in 2021, to further expand the territory of the industry’s top-ranked distributor beyond its East Coast base of operations. The acquisition adds the Texas and Gulf Coast markets to an already massive territory that stretches from Maine to Miami and many states throughout the Rust Belt.
The end of 2022 also saw Victoria PLC, a UK-based distributor, announce the acquisition of Florida-based International Wholesale Tile LLC, a specialty distributor of ceramic, porcelain, and luxury vinyl tiles (LVT). This marks the second time Victoria made a significant move into the U.S. market in 2022 after having previously acquired Cali, a California-based flooring supplier, earlier in the year.
Wrapping a busy fourth quarter, Mirage, a Quebec-based hardwood flooring manufacturer, announced the acquisition of Parquets Alexandra to further strengthen its reputation as one of North America’s top hardwood flooring manufacturers.
While several notable deals closed in the fourth quarter of 2022, economic uncertainty drives divergence between buyers and sellers in the flooring M&A space heading into 2023. With many sellers having enjoyed record earnings over the previous two years, seller expectations remain high after two years of pandemic-driven revenue. However, buyers remain reluctant to view past success as an indication of future performance.
With an anticipated drop in flooring revenue and uncertainty surrounding new construction in 2023, buyers are cautious when valuing businesses in a post-pandemic market, while sellers remain confident after two years of meteoric success. These differing views could contribute to a downturn in M&A activity that continues throughout the first half of 2023.
M&A Outlook for 2023
Overall, we anticipate the combination of a market slowdown, higher inventory costs, a reduction in new home builds, and divergent views on valuation to create a more muted M&A environment in 2023 until at least the second half of the year, when buyers and sellers gain more clarity about the market and potential future disruptions moving forward. While uncertainty remains the prevailing attitude, reasons for optimism exist that could enable the flooring sector to outperform certain expectations.
Multifamily construction starts held up well, even in the back half of 2022, as rising interest rates and low inventory create affordability concerns in many households considering buying a home. Full year 2022 multifamily starts were 14% higher than the prior year, compared 11% lower single family. This sector should remain a strong source of demand throughout early 2023 as units started last year complete construction, with flooring and interior finishes being some of later trades in the building cycle.