SPACInsider contributor Eric Weidemann this week compiled his three favorite potential SPAC targets that could gain from a rising homebuilding market. We look at why they are compelling and why each could be a fit for a blank-check merger.
This year has turned many industries upside down, but homebuilding is undergoing a surprising surge amid the pandemic. In a National Association of Home Builders/Wells Fargo Market survey that asks homebuilders to rate their confidence in current and future market conditions, they displayed the highest confidence that has been recorded since 1985.
This sentiment scored a rating of 90 in November, as compared to 85 in October and 30 in April amid the initial throes of COVID-19. Housing permits for single family and multifamily construction projects through September 30 are also up about 4% compared to 2019.
David Weekley Homes
Texas and Florida rank by far as the fastest-building markets in 2020 to date with over 165,000 and 121,000 permits, respectively. This represents about 27% of all new homes being built in the US, and the company best positioned to ride this trend is Houston-based David Weekley Homes.
The company is the largest private builder in the US, having closed 4,804 total housing units in 2019, including 2,233 in Texas and 1,016 in Florida. This landed it as a top 20 homebuilder overall, with an estimated revenue of about $2.2 billion.
SPACs have hopped on the new-home trend in recent months with LF Capital Acquisition Corp.’s (NASDAQ:LFAC) proposed combination with Landsea Homes. Other SPACs have approached the same thesis less directly, as with Social Capital II’s (NYSE:IPOB) combination with online home marketplace Opendoor Labs and Gores Holdings IV’s (NASDAQ:GHIV) deal with United Wholesale Mortgage.
With many family-owned companies, succession prompts M&A and this company’s namesake founder David Weekley is now in retirement age having founded the company at the age of 23 in 1976. A SPAC combination would allow him to both cash out and keep a seat at the table for himself or others he preferred stay involved.
Despite the 2020 building uptick, there are still many houses to build and many markets are facing tight supply as remote workers migrate from urban areas to more affordable locales. And, three of the top 10 markets seeing drops in available houses for sale – San Antonio, Houston and Fort Worth, Texas – are in David Weekley’s backyard.
Katerra has its own approach to filling the estimated 7 million-home shortage in the affordable housing market by providing both construction services and building its own green pre-built building components as a supplier.
The pre-fab materials it manufactures focus heavily on cross-laminated timber, which has lower environmental impacts than concrete or stone. Katerra’s building approach is also designed to help Fortune 50 companies achieve carbon-cutting goals with faster building speed than alternative approaches.
To scale up its building boom through the years, it has raised more than $1.4 billion in venture funding since its 2015. Most recently, it netted $200 million from Softbank in May, which also prompted a leadership shakeup putting former Schlumberger Chairman and CEO Paal Kibsgaard at the helm.
Softbank led an $865 million round in the company in 2018, and with the new moves has signaled that it hopes to shape Katerra into a multinational construction player over the long haul. But, the company also has 11 rounds-worth of other venture investors likely eager for a liquidity event.
The pandemic has also made for a rocky climate for construction firms, particularly those building projects with large amounts of hard hats on site. Katerra and others have had to pause work at sites at various points during outbreaks. The company laid off about 400 of its 8,000 workers in June.
But, while big digs are dealing with starts and stops, the market for construction materials has continued to soar as America’s Tim Allens fend off cabin fever with home improvement projects. Home Depot (NYSE:HD) reported a 23.2% surge in Q3 sales and used the tool and timber-buying frenzy as an opportunity to consolidate, announcing a deal to acquire HD Supply Holdings (NASDAQ:HDS) this week for $8 billion.
This situation of the market pulling Katerra in two different directions and the fundamentals of green construction being strong has set up exactly the kind of value window that SPACs love to exploit.
Another company in the home improvement space that that saw the pandemic slam some doors shut is Houzz. It provides an online platform for users to get renovation ideas and connects them with vendors that can provide the necessary goods and services.
It achieved a valuation of $4 billion in 2017 and was reportedly preparing for an IPO in early 2020 when such plans were scuppered by COVID-19.
Similar to Home Depot, Houzz has since bounced back with queries through its platform jumping 58% year-on-year in June.
But, the IPO wasn’t the only idea Houzz had to pause earlier this year. It also scrapped plans to develop its own private label line of home products that it could sell alongside third-party products on its site.
Pivoting to manufacturing its own goods would be an expensive move in terms of capex, but one that ultimately makes sense as a way of generating value from its more than 40 million users. While it gets a cut of good sold on its platform, the margins for in-house products would be much higher.
Amazon, for instance, is expected to generate $25 billion from its private label sales in 2022.
A combination with a SPAC would put both of these initiatives back on the table – opening up the company to retail investors and interior design aficionados and giving it the cash to start hawking its own wares.
Houzz is likely already on the radar of the nine SPACs that have listed with a focus on consumer targets and Tailwind Acquisition Corp. (NYSE:TWND) stands out as a particularly good fit. Chaired by Casper co-founder Philip Krim, Tailwind has been searching for an ecommerce brand to scale. One of the 13 fintech SPACs could also see the potential for the platform in overlaying financing options with its furniture sales.