By Daniel Hunter

Rising valuations and an improving house building industry followed by a recovery in construction will see the number of deals in the building products sector increase in the coming years, accountancy and business advisory firm BDO said today (Wednesday).

In its report, Rebuilding for the future, which analysed 375 transactions in the sector since 2008, it found that dealflow in 2012 was 65% higher compared to 2010, a low point for the sector, and that the trend was set to continue.

Distressed acquisitions have become commonplace in the past few years. This has been consistent with increasing numbers of administrations, liquidations and receiverships within the construction sector as a result of the prolonged recession (between Q1 2008 and Q4 2012, 17,627 insolvencies were seen - 4,363 took place in 2009 alone).

Perversely though, this was found to be good news for those businesses which remain - their continued existence showing them to be fundamentally strong. This steady rise in the quality of businesses available, coupled with reduced competition facing those businesses which have survived the recession intact, has made them more attractive to buyers and there has been a noted bounceback in valuation multiples.

Additionally, whilst the profile of buyers has changed since the crisis - trade buyers have become more prevalent than financial buyers (financial transactions fell from 27% in 2008 to 15% in 2012) - private equity investors have continued to seek strategic opportunities and have been willing to pay competitive multiples.

M&A amongst businesses operating in lightside products and services has been strong in the past year, a reflection of a shift away from construction and towards repairs, maintenance and improvements as budgets have been tightened. The recent IPOs of both Crest Nicholson and Countrywide, however, have demonstrated a rejuvenated housing sector. M&A activity amongst businesses operating in more heavyside products and services is predicted to improve.

Other sub-sectors identified for increased M&A activity are insulation and efficiency products - where energy cost increases and incentives for energy saving techniques are driving growth - and mobility products, which is being driven by the UK’s increasingly aging population.

“Despite major challenges faced by the sector over the last few years, M&A activity has bounced back faster than output and the recovery in multiples along with positive house building prospects should ensure further deal activity," John Stephan, M&A Partner at BDO, said.

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