QXO has many in the building products space confused or in awe with its recent announcements on its investments to disrupt the space.
This week the tech-forward company announced that it has entered into purchase agreements with investors for a $3.5 billion private placement financing that puts it on the path to have purchasing power of more than $5 billion, also putting the company in position to acquire a number of large public and private companies.
Some report that the investments represent the largest raise in the history of the building products industry.
Previously, the company’s Chairman and CEO, Brad Jacobs, said he plans to build QXO into a $50 billion company in the next decade. QXO declined to comment beyond the press release, but a person familiar with the investment said investors include several well-known firms, including long-time XPO shareholders Orbis Investment Management and T. Rowe Price, in addition to Morgan Stanley Investment Management, Liberty Mutual, Sequoia Heritage, and Madrone Capital Partners.
While construction is limited by an array of issues, QXO promises disruption and value add from a number of future acquisitions along with a healthy infusion of technology.
“Brad Jacobs’s track record of quickly creating multibillion-dollar businesses while creating tremendous shareholder value is almost unparalleled, and I want to emphasize quickly,” said industry expert John Burns, CEO at John Burns Research and Consulting. “The industry impact will almost certainly be substantial.”
The company’s growth plan is to leverage technology to grow to an $800 billion building products distribution leader, which certainly would be substantial.
“QXO’s massive investment in the building products industry is both a bold and an obvious move,” said Craig Webb, president of construction supply consulting group Webb Analytics LLC. “It’s bold because of the unprecedented size of the equity offering. But, it’s also logical because America is so severely under built, and our construction processes are so haphazard, that any company that finds a way to serve this market efficiently stands to make a lot of money.”
Right now, building product players and stakeholders attribute success in the industry to human factors, like building and maintaining the right relationships, which puts a lot of players back on their heels with an intense fear of change.
“A goal of $1 billion in year 1 to $5 billion within 3 years is aggressive in any vertical,” said Grant Farnsworth, president of building products research firm The Farnswroth Group. “Now, layer on the fact that Jacobs wants to do it in building products, and that goal may be unheard of. No doubt he will need to write checks to potentially buy or acquire success. The questions that remain seem to be: Will his solutions solve industry challenges? Is he creating product without a need? Is the need great enough to support $5 billion? How quickly can building products adapt and adopt?”
Todd Tomalak, principal of the Building Products Advisory at housing data group Zonda, thinks that the timing of QXO’s announcement is ideal.
“The industry is moving to a different phase, from unwinding pull-forward to postponed deferral,” he said. “The last time the industry faced such deferral, remodeling grew by more than 25% for 3 straight years as soon as rates stabilized.”
However, he points out that the industry doesn’t handle swings of that magnitude easily, so if a business can deliver product on time, and can impact the productivity of labor, it will have significant pricing power over its competitors. A recent example of this was how window and door suppliers managed pricing in 2021 as they struggled with being able to deliver product.
“Change is ahead,” Tomalak continued. “Channels of distribution were already shifting, but given the scale of this investment, we think the next five years look quite different than the prior 15.”
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