Industry Focus: An Industry Gets Active
This article first appeared in the 2013 Industrial Distribution January/February issue. You can view it here.
C.A. Burkhardt, Senior Managing Director of HT Capital Advisors, discusses the specifics behind the significant growth in the ID M&A market in 2012
The year 2012 followed 2011 as a very active year for industrial distribution mergers and acquisitions. As in the first six months of 2012, there was merger/acquisition activity in most industrial distribution segments in the last six months of the year as indicated by the selected transactions discussed in this article. From our own experience representing some business owners in 2012, we believe that one of the driving forces behind many sale transactions was the fact that owners were motivated to close a transaction in 2012 to lock-in the record low 15 percent federal capital gains rate which would expire at the end of the year unless Congress acted. Timing is often everything in the world of mergers and acquisitions. Business owners who sold their companies in 2012 should be very happy campers. As part of the “fiscal cliff” agreement, the capital gains rate will increase to 23.8 percent, including a 3.8 percent Obamacare surcharge, for families with incomes over $450,000.
The Big Fish
The largest industrial distribution transaction in 2012 was the September acquisition of publicly held Interline Brands ($1.25 billion-sales), which distributes a broad line of MRO products, for $1.1 billion by two private funds. In December, Interline enhanced its jan/san operations and geographic footprint with the acquisition of JanPak, based in North Carolina, with 17 distribution centers in the Southern tier. The price was $82.5 million (36 percent of sales of $236 million, and 9.4x adjusted EBITDA).
The Wholesale Electrical Distribution Sector continued to consolidate in 2012, and several acquisition transactions were announced. The buyers included some of the largest national firms, as well as some large regional companies. Diversified electrical/integrated supply company Turtle and Hughes acquired our client, Magtrol, an electrical/automation distributor based in California. The $650 million-sales company Mayer Electric Supply, based in Birmingham, Alabama, extended it geographic footprint to the attractive Texas market with the acquisition of our client, Mustang Electric Supply, based in the Dallas area. Like many other large regional firms which would be ideal acquisition candidates for the large national wholesale electrical distributors, Turtle and Hughes and Mayer Electric apparently wish to remain independent and grow organically and through acquisitions.
The largest wholesale electrical transaction was $6.1 billion-sales WESCO’s acquisition of Canada-based EECOL Electric Corporation, a full-line distributor with 57 branches in Canada and 20 in South America. The price was reported to be in the range of 1x EECOL’s sales of about $920 million. Rexel Holding acquired Oregon-based Platt Electric Supply for about $400 million (1x 2011 sales), and Boston-based Munro Distributing Company for a reported $150 million (approximately 1x estimated sales). Munro is a leader in the development of innovative energy efficiency solutions and will enhance Rexel’s existing energy efficiency initiatives. Energy efficiency is a hot topic, and providing solutions to customers is a major growth opportunity for electrical distributors.
Plumbing, PT & More
In the Plumbing sector, $9.7 billion-sales Ferguson, the largest plumbing distributor in the U. S., acquired Davis & Warshow, Inc., the leading residential and commercial plumbing distributor in the New York metro area. Founded 87 years ago and headquartered in Maspeth, New York, the company has eight wholesale and seven showroom locations. The company has been well known for its “green” initiatives, and, as expressed by Ferguson in its press release, should help Ferguson accelerate its own green initiatives. Ferguson’s British parent, Wolseley plc, has an agreement to acquire 27 branches, generating sales of about $66 million (USD), from Burdens Limited, a major UK supplier of various drainage and civil engineering products.
Several of the major Power Transmission/Bearing Companies made acquisitions in 2012, many of which were diversification moves into adjacent product line markets including safety, electrical, automation, and motion control. Such expansion of product portfolios is a way for industrial distributors in all sectors to generate additional sales from their core customers, and is a trend we expect will continue. The oil and gas industry is the end-market that companies in this sector, and other sectors (including electrical and hose & accessories), are most interested in increasing exposure to through acquisition.
DXP Enterprises holds the record for the most transactions closed—six in the first half of the year, with considerable emphasis on safety products and services. Applied Industrial Technologies, which had made three acquisitions in Canada in 2011, further enhanced its global footprint with the acquisition of SKF’s Australian and New Zealand distribution operations, which generated estimated sales of $83 million from 29 branches in Australia and eight in New Zealand. And it started off 2013 with the January 1 acquisition of Parts Associates, a Cleveland-based distributor of maintenance supplies, fasteners, and various other products.
Kaman Industrial Technologies acquired $80 million-sales Zeller Corporation, a distributor of electrical and mechanical components for industrial power, automation and control, based in Rochester, New York, with branches in Syracuse, Buffalo, and in Massachusetts and North Carolina. The acquisition expands Kaman’s automation and motion control product portfolio to include electrical controls and power distribution products, and complements and strengthens Kaman’s previous acquisitions including Minarik and Target Electronic Supply. Kaman also acquired Florida Bearings Inc., a $20 million-sales distributor of bearings, power transmission, and pump products. Based in Miami with branches in four other Florida cities, the acquisition gives Kaman a strong position in Central and Southern Florida.
Hose & Accessories
In the Hose and Accessories Sector, merger/acquisition activity continues to be dominated by the involvement of private equity firms. Singer Equities, based in Glen Burnie, Maryland, acquired Hanna Rubber Company, based in Kansas City, Missouri, a distributor of hoses and fittings as well as gaskets and other extruded and molded rubber products. This is the first acquisition for Singer under the ownership of AEA Investors, which acquired the company from another private equity firm in 2011. Founded in 2000, Singer had previously made ten industrial rubber product acquisitions. AEA Investors recently acquired Bishop Lifting Company, based in Houston, a fabricator and distributor of wire rope rigging hardware, with eight branches, and placed it and Singer under the umbrella of SB Holding. The rationale is that the two companies have common customers, and therefore there are cross-selling opportunities, and there may also be some economies of scale.
Another major player in the hose and accessories sector, privately held GHX Industrial (with revenues of about $215 million), was acquired by United Central, the largest distributor of mining supplies, which is owned by a private equity firm. The two companies will operate as independent subsidiaries of a new holding company, United Distribution Group. A press release about the transaction indicated that GHX would continue to grow through acquisitions. In December, GHX acquired Phoenix-based Express Hose and Fitting, which distributes hoses, fittings, and other products primarily to the mining industry in Arizona.
A new consolidator of the hose and accessories sector is Motion & Flow Control Products, based in Denver, and created in 2011 by the private equity backed merger of McCoy Sales Corporation and Fluid Connector Products. The company acquired American Hose & Fittings, a Kent, Washington-based distributor of fluid connectors, seals, and related products, which – like Motion & Flow Control Products – is a full-line distributor for the highly regarded Parker Hannifin Fluid Connector Group.
Private equity firms were also involved in the most significant transaction in the Fluid Management Distribution Segment. FCX Performance, an approximate $180 million-sales distributor of valves and other process flow control products serving MRO and OEM customers, was acquired by Harvest Partners, from Sterling Investment Partners, which will still have an ownership interest. Sterling acquired FCX in 2008 and supported the company’s growth through acquisition strategy. From 2008-2011, FCX completed several acquisitions, and has 22 operations covering 33 states.
MRC Global acquired Midland, Texas-based Production Specialty Services which distributes pipes, valves, fittings, and MRO products to oil and gas customers – through one distribution center and 17 branch locations – in the dynamic Permian Basin and Eagle Ford shale areas in Texas and New Mexico.
Cutting Tools, Safety
In the industrial cutting tool and abrasives distribution sector, private equity-backed Blackhawk Industrial Distribution, based in Broken Arrow, Oklahoma, continued its buy-and-build consolidation strategy, and expanded its geographic footprint for the first time outside the central U. S. with the acquisition of Seattle-based E. F. Bailey Co., which distributes cutting tools, abrasives, and other MRO products. The company’s distribution territory is primarily Washington, Oregon, Idaho and Montana. The transaction is Blackhawk’s seventh since the Company was founded in 2010. Wheeling, Illinois-based industrial supply company DGI Supply acquired Los Angeles-based Tool and Abrasive Supply, which specializes in carbide and high speed steel cutting tools, abrasives, cutting fluids, and MROP products. DGI also acquired Ocala, Florida-based Anich Industries, which distributes a full-line of cutting tools, abrasive, and MRO products.
In the safety products distribution sector, the largest transaction was WESCO’s acquisition of Conney Safety Products, a distributor of a broad line of safety products, including first-aid supplies, safety glasses, gloves, respirators, and fall protection equipment. The acquisition complements WESCO’s existing safety product operations, and enhances its e-Commerce capabilities. Great Britain-based Bunzl, Plc. enhanced its safety product business with the acquisition of Canadian distributor McCordick Glove and Safety, Inc., which had sales of about $53 million dollars. Bunzl also acquired Atlas Healthcare Ply Ltd., an Australian distributor of workplace safety and healthcare products.
While there is much uncertainty about the future prospects for the U.S. economy, we believe that 2013 will see a continuation of the healthy industrial distribution merger/acquisition environment that prevailed for both buyers and sellers in 2011 and 2012. The December 2012 economic forecast for 2013 and 2014 from the Manufacturers Alliance for Productivity (“MAPI”), while not exuberant, was somewhat encouraging. MAPI forecasts that industrial production will increase 2 percent in 2013 with an increase to 3.2 percent in 2014, outperforming GDP growth estimated at 1.8 percent in 2013 and 2.8 percent in 2014.
The major positive dynamics that have been the driving forces behind the significant level of merger/acquisition activity in 2011 and 2012 are still present. If the U. S. economy does not tank into another recession, the major strategic acquirors in most sectors of industrial distribution – including Kaman Industrial Technologies, WESCO, REXEL, Sonepar, MSC Industrial, Grainger, DXP Enterprises, Applied Industrial Technologies, Airgas, and many others – will continue to seek acquisitions to achieve their strategic growth objectives through product line and end-market diversification and geographic expansion. Most importantly, many have substantial cash resources to pay for acquisitions, and bank financing is somewhat more readily available at attractive interest rates.
Private equity firms with industrial distribution platforms, some of which were mentioned above, continue be on the acquisition trail for add-on acquisitions. It is estimated that private equity firms have substantially over $500 billion to put to work. We know that several of them are interested in establishing an industrial distribution platform because they have contacted us seeking acquisition candidates.
Pent-up desire by many owners to sell will continue to be a major driving force behind the level of merger/acquisition activity. We have talked to the owners of many independent companies in all industrial distribution sectors about their interest in positioning for a sale transaction. Many have been approached by potential buyers and are now seriously considering exploring the sale of their companies in 2013. While the federal capital gains tax rate has increased from 15 to 23.8 percent (including the Obamacare surcharge), we do not believe the increase will have a negative effect on the level of industrial distribution merger/acquisition activity. On the contrary, the argument can be made that business owners who are inclined to explore a sale transaction will do so in 2013 because they are relieved that the rate did not increase even greater, and because of a lurking concern that in the future the rate could go higher.
C.A. Burkhardt is Senior Managing Director of HT Capital Advisors, a private investment banking firm founded over 60 years ago. He heads his firm’s team focused on the industrial distribution industry. He can be reached at firstname.lastname@example.org.