Merger Mania Returns with a Vengeance

Since July 1997, the cabinet industry has undergone a series of acquisitions that have altered the ranks of the top companies. The latest round of blockbuster buyouts has altered the makeup of the cabinet industry.

BY LARRY ADAMS

 

The following is a partial list of acquisitions and mergers in the cabinet industry between 1985 and 1998.

1998:

Schrock purchased by Fortune Brands

Decora merged with Fortune Brands

Westwood Products purchased by Elkay

HGI invests in Republic Industries

Triangle Pacific purchased by Armstrong World Ind.

Norcraft purchased by Pfingsten Partners

 

1997:

Texwood Ind. purchased by Masco

The Alvic Group purchased by Masco

Rutt Custom Cabinetry purchased by Berwind Financial Group

Heritage Custom Kitchens purchased

by Berwind Financial Group

Brandom purchased by Distributors USA

Karman purchased by Distributors USA

General Marble purchased by RSI Home Products

 

1996:

MasterCraft Cabinets purchased by

Elkay from St. Charles Cos.

Canac purchased by Kohler

 

1995:

Homecrest purchased by Omega

 

1993:

Yorktowne purchased by Elkay

Medallion purchased by Elkay

 

1990:

KraftMaid purchased by Masco

 

1989:

StarMark purchased by Masco

Whirlpool Kitchens purchased and becomes St. Charles Cos.

Yorktowne purchased by Berkley Capital Corp.

United Cabinet Corp. purchased by Daniel and Murray Shade

 

1988:

Aristokraft purchased by Fortune Brands (formerly American Brands)

Decora purchased by Fortune Brands (formerly American Brands)

Brandom purchased by private investors

Medallion purchased by Corporate Data Sciences

Merit purchased by Patmar Industries Inc.

Western Cabinet & Millwork purchased by Weskar Inc.

Amende Cabinet Corp. purchased by American Woodmark

 

1987:

Atlantic Cabinet purchased by Alumax Aluminum Corp.

Karman Kitchens purchased by Mantle White Co.

 

1986:

Mastercraft purchased by Whirlpool

St. Charles purchased by Whirlpool

Fieldstone purchased by Masco

Diamond purchased by Tappan

Cabinet Group purchased by WCI from Tappan

Triangle Pacific purchased by Beta Partners

Montvue purchased by Homecrest

 

1985:

Merillat purchased by Masco

Riviera Cabinets purchased by APL Co.

Kitchen Concepts purchased by Gutchler

 

Source: KCMA, W&WP reports

The highly fragmented cabinet industry solidified somewhat over the last year and a half as three of the country's largest cabinet companies were bought out by companies looking to increase market share. A fourth company was purchased by a private-equity investment firm that was looking to enter the booming cabinet market.

The headline-making acquisitions included:

  • Masco Corp. acquiring Texwood: Industry leader Masco increased its market share lead, and topped $1 billion in cabinet sales, with the July 1997 acquisition of Texwood Ind. of Duncanville, TX. Texwood, which recorded approximately $150 million in sales in 1997, markets its cabinets under the brand names Quality Cabinets andWoodstar Cabinets. The company also has a cabinet door and component part company, Quality Doors. Masco now controls about 15 percent of the estimated $6.5 billion U.S. cabinet market.
  • Fortune Brands acquiring Schrock: Fortune Brands, a national conglomerate whose portfolio includes Titleist golf balls, Jim Beam bourbon and Aristokraft cabinets, bought Schrock Cabinet Co. of Hilliard, OH, for $107.5 million. The June 1998 acquisition of the country's fifth largest cabinet company nearly doubled Fortune Brands' cabinet sales. Combining 1997 sales of Aristokraft cabinets, approximately $240 million, and Schrock cabinets, approximately $200 million, helps Fortune Brands leapfrog over Mill's Pride as the second largest cabinet manufacturer in the United States.
  • Armstrong World Industries acquiring Triangle Pacific: The world's largest flooring manufacturer entered the cabinet business in 1998 with its $1.15 billion acquisition of Triangle Pacific of Duncanville, TX. Armstrong acquired the company primarily for its hardwood flooring division. The division, Bruce Hardwoods Floors, Hartco Flooring and Robbins Hardwood Floors, is the world's hardwood flooring sales leader. As part of the package, Armstrong acquired Triangle-Pacific's Bruce and IXL cabinet companies, which had combined 1997 sales of $183.2 million and ranked as the sixth largest cabinet producer in the country.
  • Pfingsten Partners acquiring Norcraft: After researching the cabinet industry for a year, Pfingsten Partners, a Deerfield, IL-based private equity firm, entered the cabinet market with the purchase of Norcraft Industries of St. Paul, MN. The purchase price was not disclosed. Norcraft had 1997 sales of more than $84 million and manufactures and distributes cabinetry under three brand names: Mid Continent Cabinetry and the Pro Series for the builder/remodeler market, and Norcraft Cabinetry for the retail home center market.

Each of these recent sales offered a different benefit to the buyer. For example, Schrock's cabinet line of upscale, but not quite semi-custom cabinets, fits between Aristokraft stock and semi-custom cabinet lines, according to Gary Lautzenhiser, executive vice president of sales, marketing and business development for Aristokraft. Schrock also has some presence in home centers, a critical consideration because home centers have become a pivotal channel for cabinet sales. "When we looked at those two things, it was a nice fit for our business," said Lautzenhiser.

For Masco, the Texwood buyout was not just about filling a niche in its product offering. In fact, Texwood is very strong in the upper-end of the cabinet segment, a price point already occupied by other Masco cabinet divisions. What Texwood does bring to the table is a good distribution and customer base, and perhaps most importantly, its cabinet door and component operations. "This is a very competitive business and you are never done trying to improve," said Samuel Cypert, vice president of investor relations for Masco.

The acquisitions come at a generally prosperous time for the industry. The cabinet industry has experienced almost 12 percent growth in year-to-date sales, according to the Reston, VA-based Kitchen Cabinet Manufacturers Assn. Masco and Aristokraft each posted strong cabinet sales in their most recent quarterly reports. In fact, Masco projected that 1998 cabinet sales will break all sales records. Triangle Pacific's cabinet sales were down by 15.2 percent in the first quarter, ending in April, but, buoyed by strong flooring sales, the company's sales as a whole were up more than 19 percent.

"The consolidations are a sign of industry maturation," said Richard Titus, executive vice president of the KCMA. Titus' comments echoed statements he made 10 years ago during a similar round of big-name acquisitions.

In for the Long Haul

The positive sales performance, coupled with an opportunity for growth, is the cabinet industry's drawing card for investment firms. These firms provide an influx of working capital but often demand quick returns. Pfingsten Partners wants to double Norcraft's 1997 sales of more than $84 million in five years.

"The things we liked about the cabinet industry are its size, the fragmented nature of the industry and the type of industry it is," said Thomas Bagley, senior managing director of Pfingsten. "We tend to like low- to medium-tech manufacturing businesses that have growth potential both internally and through acquisitions."

A second investment firm, H.I.G. Capital, also recently invested in the cabinet industry. The equity firm has invested in Republic Ind. of Marshall, TX, although Republic's president, Gene Ponder, remains the largest shareholder in the company. Republic has experienced ownership by an investment firm before. North American Products, a precursor to Republic Ind., was sold to an investment group in 1984. Four years later the company filed for bankruptcy. Ponder, the original owner, bought the company back and reorganized under its current name.

"I believe the partnership with H.I.G. Capital will provide tremendous financial and operating resources which will enable us to improve service to our customers through continued investment in capital equipment, broader product offerings and greater geographic reach," Ponder said.

The failed North American Products' experience, along with others such as Whirlpool Corp.'s cabinet-venture miscue in the 1980s, has caused some industry insiders to wonder about the long-term commitment by these companies. "Frankly, outside investors are entrepreneurs looking at where they can generate the kinds of results that they are interested in," one industry insider said. "They are not necessarily in it for the long term."

"Everybody has their own opinions of what equity firms do," said Bagley. "We tend to hold on to our companies longer than most. Our focus is on growing the business. At some point, we will generate liquidity for our investors. This could mean selling the business, recapitalizing the business or taking the business public. But we are not focused on an exit at this point."

Companies owned by investment firms are not the only ones that are drawing speculation about the future.

Ever since Triangle Pacific was purchased, there has been talk that Armstrong would ditch the Bruce and IXL cabinet divisions. Bruce and IXL cabinets are the only cabinet producers in Armstrong's portfolio and would represent less than 9 percent of Armstrong's overall sales. Armstrong's finances were also put into a "bit of a strain" because of its acquisition of Triangle Pacific at about the same time as it acquired DLW, a leading European flooring manufacturer, according to Cynthia Werneth, a bond rate analyst who tracks Armstrong for Standard & Poor's stock index. Also, Armstrong is facing a number of asbestos-related legal actions, but Werneth said the company has set-aside enough money to pay the anticipated legal costs.

"While Armstrong has said it intends to keep the cabinet division, (selling it off) could be one thing they are thinking about," Werneth said. "They do not have any other cabinet business, and certainly the profit margins are not as high as in flooring. I could see scenarios where Armstrong might entertain offers for it."

Floyd Sherman, chairman and CEO of Triangle Pacific, refuted the speculation. "Armstrong intends to let us continue to develop the cabinet industry," he said. "In the near term, I think we can grow the business to about $500 million (the size of its flooring division) and, in my view of our cabinet business, we can eventually grow it to the size of the flooring division."

That is an aggressive goal considering Triangle Pacific's struggles in the cabinet market. Throughout the late '80s and early '90s, the cabinet divisions were often overlooked in favor of the flooring divisions. Working with a "really, really terrible balance sheet," according to Sherman, the company would often have to cut back cabinet operations and put those resources into its flooring division. "Cabinets were continually constrained in its growth," Sherman said. "This merger gave us a new lease on life."

More Acquisitions Possible

Growth through acquisition may not end any time soon, some analysts said. Wood-Mode, for instance, is reportedly up for sale.

Driven by increased competition and a more discerning consumer, some companies may look to acquisitions to increase market share, add new products or price points, and establish new distribution networks.

"Given the fragmented nature of the industry, acquisitions give significant opportunity for a company like Masco to be a major consolidator in the U.S. cabinet industry," said Wes Chinn, a bond ratings analyst for S&P.

While companies could start up divisions to design and manufacture products, or do them in-house in existing facilities, it is often cheaper to buy a company that has established facilities and products "because of the expenses and other costs associated with a start-up project," Cypert said.

No matter how much consolidation, "there will always be a place for smaller entities," said Titus. "There is still going to be that small entrepreneur doing a good job in a local area."

If that is the scenario -- large companies expanding and smaller companies filling market niches -- then mid-sized companies are bound to feel the squeeze. Companies that once were strong in their local or regional market now face competition from national cabinet companies that can sell to most price points and often have established distribution networks that ensure a prominent place on home center and kitchen and bath dealers' shelves. Many in the industry see the face of the cabinet business undergoing a permanent change, with mid-sized companies struggling to find a place.

"The efficient manufacturer that offers quality and service and the ability to directly access the consumer is going to be the survivor in this business," said Sherman. "The industry has allowed too many marginal players that have existed for a long period of time."

Larger companies also have deeper pockets which gives them an advantage because they can invest in new technologies to increase production capacity and efficiency or to meet governmental regulations. At least one cabinet company, Hoffman-Atchley's, shuttered its doors in 1989 in the face of Southern California's strict air quality regulations. The company reportedly closed because it felt it could not meet the regulations and still make money.

Large companies also have the edge when competing for raw material. For instance, several years ago the demand for particleboard outstripped supply and panel suppliers were forced to allocate the scarce product. When push came to shove, and panel companies had to determine whom to ship to, the best customers, i.e. the biggest, were usually served first.

"Generally speaking, to be very big is good and to be very small is good, but to be stuck in the middle is not so good," Bagley said.

A Decade of Buyouts

These consolidation issues or the current climate of acquisitions are not new to the cabinet industry. The merger mania that swept through the business world in the mid '80s and early '90s also hit the cabinet industry.

More than a decade ago, the industry experienced the start of a series of acquisitions that gave rise to Masco and others, while sounding the death knell for at least one cabinet company. Only a handful of the 25 largest cabinet companies operating in 1988 remain untouched a decade later. Of the 10 largest cabinet companies in the industry this year, seven of them have either been acquired themselves or have bought out another company. Two other top 10 companies were not even in existence 10 years ago.

Today's industry leader, Masco, was the leader in acquisitions in the mid-80s. Prior to 1985, the plumbing products company did not have a presence in the cabinet industry. Within a year, Masco had acquired its way to the top of the industry. Its first prize was Merillat, then the biggest-selling cabinet company in the United States. During the next 12 years, Masco purchased a number of high-profile companies including KraftMaid, StarMark, Fieldstone and Texwood. Masco's market share nearly doubled in that time frame. By 1997, Masco's cabinet sales had topped $1 billion, making it the sole member of the cabinet industry's billion dollar club. Its sales that year were greater than the combined sales of the cabinet industry's 11th through the 25th largest companies featured in Wood & Wood Products' April 1998 Top 25 survey.

"Our strategy is to acquire companies that are leaders in their market niches," said Cypert. "We keep the management in place and give them support to grow the business."

Chinn concurred: "Acquisitions are a key part of Masco's growth strategy."

Not all acquisitions resulted in success. One of the industry's biggest failures was Whirlpool's 1986 purchase of Mastercraft and St. Charles. By 1988, Whirlpool was looking for another buyer. The appliance giant tried to sell its cabinets in the same manner as it sold appliances and it just did not work. Management reportedly alienated dealers and distributors, and the companies suffered. The cabinet division was sold in 1989 and renamed St. Charles Cos. In 1996, St. Charles sold Mastercraft to Elkay, another conglomerate that bought its way into the cabinet industry.

Consolidations Can Mean an Uncertain Time for Workers

For many laborers, "streamlining operations" is a euphemism for shuttered or sold factories, plant-wide layoffs or reductions in their benefits. "The first thing an acquisition announcement does is lead to uncertainty," said Denny Scott, an economist with the United Brotherhood of Carpenters, a union that represents many workers in the cabinet and furniture industries. "From the first announcement in the mills, the workers worry about what this means to their job security."

Scott said Fortune Brands' acquisition of Schrock could help pave the way to a new effort to unionize workers because Schrock's new sister company, Aristokraft, has union workers at its Jasper, IN, plant. Scott said previous efforts to organize labor at Schrock were thwarted by Schrock's former owner, the Swedish conglomerate AB Electrolux.

"Companies that succeed work hard to make employees an integral part of the manufacturing process," Scott said. "The best companies allow the workers to use their brains as well as their hands."

Good for Consumers

Consolidation can be good for consumers. Theoretically, products can be produced cheaper and faster by bigger companies who benefit from economies of scale. The consumer also often has more cabinet choices as bigger and stronger companies have greater wherewithal to introduce new lines or options, reduce lead times and/or add distribution outlets.

"Although the merger acquisition activity among cabinet companies does not directly affect member dealers, the consumer, as the end user, actually benefits the most," according to a statement from the National Kitchen & Bath Assn. "They receive better, more sophisticated products at more competitive prices. When companies merge, each brings with them their own expertise and knowledge regarding building better products for consumers. Put together, these ideas ultimately design more sophisticated cabinets."

"Homeowners do benefit," said Thomas Newton, president of CertainTeed Home Institute, a Pennsylvania-based information center dedicated to educating consumers, "If you go back 20 to 30 years, companies that consolidated did not get the end results they wanted -- higher-quality, lower prices, streamlined efficiencies. That has changed. Bigger companies today are better able to eliminate redundancies and streamline operations. With manufacturing and shipping efficiencies, just-in-time deliveries and more options, homeowners have benefitted over the years."

 

W&WP's Top Ten: Then and Now

Wood & Wood Products ran its first Top 25 cabinet manufacturers survey in 1988. In that initial survey, Merillat was the number one company with annual sales of $245 million. Here is what has happened to the Top 10 companies during the last 10 years.

 

Company and 1987 Sales Figures
Notes from the Last 10 Years
Merillat Industries Inc.; $245 million Sold to Masco in 1985; Masco is the industry leader with more than $1 billion in cabinet sales.
Triangle Pacific Corp.; $180 million Purchased by Armstrong World Industries for $1 billion; ranked 6th in Top 25 this year with $183 million in sales.
WCI Cabinet Group; $170 million Reorganized under Schrock in 1994, purchased by Fortune Brands in 1998; Schrock ranked sixth in the Top 25 this year with estimated sales of $200 million.
American Woodmark Group; $125 million Purchased Amende in 1998; ranked fourth in Top 25 this year with $219.4 million in sales.
Aristokraft; $120 million Sold to American Brands in 1988 which became Fortune Brands in 1996. Ranked third in Top 25 this year with $245-250 million in sales. The combined 1997 sales of Aristokraft and Schrock were $430 million, second only to Masco.
Whirlpool Kitchens; $70-80 million Purchased in 1989 and renamed St. Charles Cos. St. Charles sold Mastercraft to Elkay in 1996.
Wood-Mode Cabinetry; $75 million Ranked 10th in W&WP's Top 25 this year with 1997 sales of an estimated $110 million.
KraftMaid Cabinetry; $66 million Purchased by Masco in 1990.
Riviera Cabinets; $60+ million Filed Chapter 11 and reorganized.
Excel Wood Products Co. Inc.; $60 million Went out of business in 1990

A Brief History of Masco Corp.

When Wood & Wood Products ran its first Top 25 Cabinetmakers survey in 1988, Masco was not on the list. If made up ground quickly, though, buying the #1 company, Merillat Industries Inc. ($245 million) and Fieldstone. Since then, Masco has remained the #1 cabinetmaker in every Top 25 Survey.

In 1990, Masco purchased KraftMaid, which was then the sixth largest cabinet manufacturer on the survey with more than $100 million in sales. Its numbers have steadily increased, except for 1992, when it reported that its sales had dipped $3 million over the previous year.

Recently, Masco has again become active in acquiring companies. In 1997, it bought Texwood Industries ($150 million) and the Alvic Group ($50 million) a Spanish producer of kitchen and bath cabinetry and components. It also bought Liberty Hardware Manufacturing Corp., a cabinet and furniture hardware producer.

Masco's latest acquisition is Heritage Bathrooms PLC, a British manufacturer and distributor of residential bathroom products. The acquisition is expected to be completed by the end of the year.

Masco in W&WP's Top 25 Cabinetmakers Survey

1988: not in Top 25

1989: #1 with $271 million

1990: #1 with $324 million

1991: #1 with $430 million

1992: #1 with $427 million

1993: #1 with $515 million

1994: #1 with $570 million

1995: #1 with $665 million

1996: #1 with $675 million

1997: #1 with $700 million

1998: #1 with $832 million

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