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Gale Media, Inc.
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Untitled Document
Distribution M&A 2007 Update: Is the Market Too Hot?
HD Supply aside, the volume of activity in distribution has increased substantially over the past 12 months. More than 100 private equity firms are targeting distribution right now, said Jim Miller, principal with Vetus Partners, an investment banking firm. And valuations have held strong, with "no real significant tick down yet."
"I actually think there may be too much activity," Miller said. "There are a lot of companies out there on the market right now that I don’t think were ready to go to market. There’s more funds interested in distribution than truly understand the space, and there are more financial advisors jumping in the space who have not done a lot of deals and are pushing for transactions where they probably shouldn’t."
Brent Grover, 25-year industry veteran and consultant with his firm, Evergreen Consulting, agreed: "Some companies have seen the market become very hot, and they have brought some bad merchandise to the marketplace. I think there are some pretty unattractive companies that have been dressed up and the market figures out pretty quickly that it’s not the kind of firm they want to buy."
Tom Lange, leader of the distribution and supply chain technology team in Robert W. Baird & Co.’s investment banking group, said low-cost financing, high valuations and a healthy earnings environment have fueled strong buy-side interest and, in general, a "great selling opportunity for quality distribution businesses."
There’s a greater percentage of uninvested equity dollars in the market as compared with last year, Miller said. "It’s a good time to be seeking a liquidity event and targeting the private equity market right now if you’re a best-in-class distributor."
Last year at this time, Miller said, "a lot of the strategic buyers were just starting to come off the sidelines." Many are now back in the market.
In some sectors, valuations will ease off in the next year thanks to a hurting residential market, volatile commodity pricing, and a dampening of other parts of the economy. "I think the likelihood is that we are at or near a plateau," Miller said.
Grover said he has started to see profits weaken, which he pointed to as evidence of issues that may affect valuations in the next year. "I’m delighted to see that the sun has been shining on distribution the past couple years, and that people recognize the potential for return on investment even though return on sales is not that strong for distributors.
"… I think if people get disillusioned with earnings they’re going to look elsewhere."
This article is based on a recent two-hour MDM audio conference. To order the CD, handouts and transcript from this informative audio conference, "Distribution M&A 2007 Update: More Buyers, New Drivers in U.S. and Overseas," click here.
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