M&A Activity Highlights '06

There were a number of big acquisitions during the first half of '06. Look for more of the same in the second half

By Jack Keough, Editor -- Industrial Distribution, 8/1/2006

One of the biggest deals to be closed this year was Home Depot Supply's $3.47 billion purchase of Hughes Supply; the deal had been widely speculated for some time. The acquisition doubled the size of Home Depot Supply, which serves professional contractors, municipalities, and maintenance professionals.

Home Depot Supply, a business of The Home Depot, Inc., is still on the acquisition trail. Through its White Cap Industries business, a major construction supplier, it recently purchased Western Fasteners, a distributor of construction fasteners, power tools and accessories serving the Western and Southwest United States. Western Fasteners has eight branches and serves customers in Colorado, Texas, New Mexico and Arizona.

The size and power of Home Depot Supply can't be overemphasized. Last year, HD Supply, through White Cap, purchased Southwest Rebar; Wire Products; West Tool; Brock Tool and Supply; Lakeside Contractors; and Greenwald Supply & Greenwald Industrial Products. These acquisitions allow White Cap expanded access to markets in the Midwest, Southwest and as far away as Hawaii. The company now serves industrial, construction, maintenance and facilities markets.

In an interview in June, Joe DeAngelo, executive vice president of Home Depot Supply, told Industrial Distribution that his division's sales will reach $12 billion this year and could grow to $25 billion by 2010. (For the complete interview, go to www.inddist.com)

Other major acquisitions recorded so far in 2006 included:

• MSC Industrial's purchase of J&L Industrial Supply for $349.5 million;
• Boeing's purchase of Aviall, an aviation parts distributor, for nearly $2 billion;
• Interline Brands' purchase of American Sanitary Supply for $127.5 million.

"These transactions indicate that acquisitions of larger public industrial distributors that are clearly strategic to particular buyers could be expected to fetch EBITDA multiples of 12 or more, at least before the recent stock market correction," wrote investment banker Starshak/Welnhofer in a recent newsletter report. The Chicago investment banking firm also pointed out that smaller, privately held add-on acquisitions could be expected to sell for somewhat lesser multiples, absent special considerations.

Private equity firms were active in merger activity in the past several months. Activant Solutions, which provides vertical business managementsoftware solutions, was acquired by two private investment firms, Hellman and Friedman LLC and Thomas Creasey Capital Partners LLC.

PRC Industrial Supply, a distributor of rubber, hose and accessories based in Portland, Maine, just a few weeks ago announced that it had been sold to Singer Equities, a private equity firm. Singer has been active in the rubber industry, buying several distributors.

Meanwhile, Apollo Management LLP announced plans to purchase Rexnord, a maker of power transmission products, for $1.8 billion. And late last year, Brazos Private Equity of Dallas agreed to purchase ORS Nasco, a master distributor of branded and private la products.

Other distributors from ID's annual Big 50 report were also on the move in 2006. The Big 50, published in June, ranks the largest distributors in the industry by sales volume.

Distributor DXP Enterprises acquired two companies, Production Pump and Machine Tech, each of which specialize in package pump equipment, fluid handling design, and pump maintenance repairs and services. DXP paid $10.1 million for the businesses.

Stock Building Supply, a subsidiary of Wolseley plc, acquired Efficient Electric, United Electric, United Plumbing and DSI, Inc. Wolseley has made 50 acquisitions world-wide since last August, with 30 of those happening in North America. In May, Ferguson Enterprises, Wolseley's U.S.-based company, purchased Central Supply, which has three locations in Alabama, and Supply North Central Group, a wholesale distributor of residential and commercial lighting and heating products operating from 11 showroom and warehouse locations across Michigan.

Also in May, Ferguson acquired the inventory and certain fixed assets of Central Lighting in Jackson, Miss., and a month later acquired Davidson Electric Wholesale Supply, a distributor of electric and plumbing supplies based in Lexington, N.C.

The acquisition trend isn't likely to end anytime soon. There is an abundance of capital available for acquisitions, investment banking firms are looking for companies to buy, and the economy continues to be relatively strong.

Twenty-five percent of distributors who participated in Industrial Distribution's 60th Annual survey of Distributor Operations were approached with an acquisition offer last year. Only a small amount of deals were consummated, but studies show that companies are looking for acquisitions to expand geographically, acquire additional product lines and reduce costs through economies of scale.

However, many acquisitions come up short in terms of creating expected value for shareholders, according to a survey of more than 400 U.S. and corporate executives by Accenture, a management consulting company.

Fewer than half of the executives surveyed said their most recent deals achieved the cost savings they expected. Information technology integration was noted as a particular challenge.

"There is a growing body of evidence that most large transactions fail to create shareholder value for acquirers," said Art Bell, a senior executive in Accenture's Strategy practice. "But what makes M&A so alluring is the less common, successfully executed deal that allows an acquirer to create shareholder value far beyond what its competitors can achieve. That is why we see most high-performing companies undertake a disproportionate number of deals relative to their peers."