White Cap taken private:Will others follow?
By Industrial Distribution Staff -- Industrial Distribution, 9/1/1999
COSTA MESA, CALIF.--Is Wall Street still the best route for distributors? Certainly, the investment community's adulation for many distribution stocks has waned. And when it comes to White Cap Industries, the feeling is mutual. Just 21 months after going public, management of the construction products distributor orchestrated a buyout of the firm last month, with the intent to make it privately held.White Cap founder and chief executive Greg Grosch, other managers and an investment group affiliate of Los Angeles-based Leonard Green & Partners L.P. will pay $16.50 a share for the Costa Mesa-based company in a deal valued at $240 million.
Grosch, who will remain chief executive of the company, is seeking to acquire the company partly because the stock has been trading "below what we thought was fair value for the shareholders," said chief financial officer Chris Lane. Speculation looms as to whether other public distribution companies might pursue the same strategy used by White Cap. The company went public in 1997 at $18 a share. The shares moved up to $24.13 in the first day of trading, but lost about 40 percent of their value over the last year. They were trading around $12 a share prior to the buyout announcement.
White Cap's plight as a public company is similar to the one traveled by Industrial Distribution Group and Pentacon, two distributor rollups that went public in the last 24 months. Both have traded well below their IPO price as they struggle to integrate acquisitions, raising concerns that they might be better off as private entities. The question has also been put to companies like Airgas and Applied Industrial Technologies, who have long histories as successful public companies but have struggled to integrate recent acquisitions.
"[White Cap's] strategy is something other companies should consider," said Pat Parr, an analyst with ING Barings LLC. "There was a window of opportunity for these small caps to go public, they took advantage and then the market turned against them. The market for small-cap, industrially exposed stocks went sour. It's not clear to me what is ever going to reverse that other than the fact that these stocks will get bigger and hopefully multiples will go up and eventually some could grow into true mid-caps. In the meantime, there's no float and few institutional investors can buy them. A lot of companies are in that situation. As they consider their strategic options, being taken private by a financial sponsor, retooling and getting some critical mass and coming public again in the future is a very viable strategy."
It's likely that most public companies have considered such a move. However, in the case of an IDG, its stock price has fallen so far below its IPO that a move to go private probably wouldn't fully appease shareholders anyway. Indeed, many White Cap shareholders are upset that the firm settled on a price that is below its IPO price. At press time, two shareholder lawsuits had been filed against White Cap.
"The valuation is probably not what a lot of shareholders would have liked to have seen," said one industry source, noting that a fairer price would have been in the low to mid 20s. "If you look at the relative valuation, it wasn't very good."
And one industry executive thinks that while the move may suit White Cap, it might not be for everybody.
"I'd be willing to guarantee that any other rollup has thought about it; you'd be remiss if you haven't," he said. "You've got to weigh the pros and cons differently. For rollups in the digestion phase, there may be a two or three-year period where they are staying on the sidelines regarding acquisitions, and going private may make sense.
"We've thought about it, but believe our public forum is [better] right now. [A management buyout] is a viable concept, no doubt. Ultimately, the exit vehicle for a lot of people that would go private would be to go public again or to sell."
In that case, don't be surprised to see White Cap walk down Wall Street again sometime in the future.
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