UPDATE: WESCO to buy IDG for $130 million

Industrial Distribution staff -- Industrial Distribution, 4/17/2008 6:01:00 AM

Industrial Distribution Group Inc. is set to accept a $130 million buyout offer from Wesco International, the parent company of Wesco Distribution.
The $11.75-per-share offer trumps three previous bids from two equity players and a mystery firm identified only as “Bidder D”—which turned out to be Wesco.
Platinum Equity Advisors LLC first offered $113 million in February, followed by a counter-offer from Luther King Capital Management Corp. for $128.4 million.
Then, in a statement released April 7, IDG said "Bidder D" had submitted a counter-offer April 4 for $120.7 million.
After the Luther King bid, IDG said its board was holding to its recommendation to accept the Platinum Equity offer. But the latest Wesco proposal prompted the Atlanta-based MRO distributor’s board to withdraw that recommendation and approve the Pittsburgh-based electrical and MRO distributor’s bid.
“The pending acquisition by Platinum Equity, which was approved on February 20, 2008, would pay [IDG’s] stockholders $10.30 per share in cash. The board of directors unanimously determined that the Wesco offer … is a ‘superior proposal’ under the merger agreement between the company and Platinum Equity,” IDG said in a statement.
Platinum, however, can keep its hat in the ring with a counter-offer; IDG said the equity player has until the close of business April 21 to match or top the Wesco bid.
“Depending upon Platinum Equity's response (and Wesco's counter-response, if any), Platinum Equity could have an additional three business-day period under the Platinum merger agreement to consider its options before [IDG] could execute an agreement with Wesco. Wesco's definitive offer expires at 5 p.m. Eastern time on April 23, 2008, if not accepted by [IDG], unless it is extended by Wesco,” according to the IDG statement.
As for Luther King, IDG said the firm “is being permitted to continue its evaluation of [IDG] during this period, if it chooses to do so based on a belief that it may be able to offer a superior outcome for the Company's stockholders.”
"We are pleased by this definitive recognition of additional value for IDG that can be delivered to our stockholders. While we do not know whether Platinum Equity or the Luther King companies will decide to offer a superior outcome for our stockholders, it is consistent with our contractual obligations to Platinum Equity and fiduciary duties to our stockholders to provide both of them a reasonable opportunity to do so," IDG chairman Richard Seigel said in the statement.
Wesco agreed to pay a 3 percent breakup fee to Platinum Equity if the deal goes through.
If consummated, the acquisition would bolster Wesco’s integrated supply operation and add to the company’s line card, senior vice president and CFO Stephen Van Oss said.
“IDG's small site integrated supply services is a great strategic fit for Wesco and extends our capabilities to a broader array of customers seeking comprehensive and cost effective solutions to their procurement and management of maintenance and indirect items. Additionally, the acquisition of IDG and their management team augments our existing industrial MRO capabilities, adding a broader base of products and services that can be offered to our large base of national account customers,” Van Oss said. “The past financial performance of IDG has been stable, and we believe significant improvement in performance can be achieved. We intend to incorporate IDG into Wesco's infrastructure and utilize our lean processes to achieve significant improvement in financial results and in value for their customers."
And if the deal goes through, Van Oss said Wesco would “achieve significant identified synergies” over the following year and add up to 12 cents to the company’s earnings per share during that time.
Jonathan Skelly of PCE Investment Bankers in Winter Park, Fla., called the deal “interesting” for a number of reasons.
“Wesco, as you’ve seen over the past couple of years, has really gone through a diversification strategy [with its acquisition of electronic components distributor] Carlton-Bates Co. and [wire and cable distributor] Communications Supply Holdings Inc., becoming more of an industrial-focused business and diversifying away from the core commercial and electrical contractor-driven business,” Skelly said. “This acquisition sort of moves along in a similar light. IDG should be a nice fit with the Bruckner Supply integrated supply business [Wesco]acquired.”
Another interesting aspect is IDG’s focus on small and mid-sized integrated supply accounts, he noted.
“Typically with distributors and distribution generally, your largest customers tend to be your least profitable ones. Your smaller, more ‘niche-y’ ones tend to be more profitable,” Skelly explained. “I think this is a way for [Wesco] to pick up some smaller additional customers than the larger ones they’re doing business with today, and also strengthen their relationships with existing customers by becoming a much larger integration supplier in general.”
As for IDG, which has posted disappointing results lately—sales slipped about 2 percent and net income dropped nearly 40 percent during fiscal 2007—Skelly said the company has been working to integrate the various companies it acquired when it was formed as a roll-up of nine broad-line distributors in 1997.
“The thing about IDG is you almost have to look at it on a former company-by-company basis,” he said. “Each of those companies in their own little market was a great business. When they put them all together, they had some integration issues. I’m sure Wesco looked at each of those companies and their pockets of strength within their markets. … Wesco might be able to make further operational improvement to the business. IDG has been working hard to take it away from a roll-up and make it more integrated. Wesco has done a lot of acquisitions and done a lot on the integration side.”