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The Year in Distribution: 2007
It’s been quite the year, with HD Supply changing hands and consolidation kicking into high gear. As distributors move into 2008, opportunities exist for growth, but they may be more difficult to find as the economy shifts into lower gear.
We thought it couldn’t get more interesting than 2006, when HD Supply bought Hughes Supply for $3.4 billion and recorded triple-digit growth throughout the year – thanks to a still-booming residential market and an aggressive acquisitive growth strategy.
Boy, have things changed.
Boy, have things changed.
For one, HD Supply is no longer in the hands of Home Depot and already is starting to shed some of the weight it put on over the past several years. Though it was a big deal when HD Supply was sold to a trio of private equity firms, every other distribution market arguably saw its own even bigger deals.
And HD Supply’s quick growth didn’t last long, at least in its construction-related segments. Residential markets in the U.S. have taken a turn for the worst. This means other distributors connected to residential markets that had been seeing explosive growth are suddenly fending with negative growth.
Building materials distributors in particular have started planning layoffs and shutting down distribution centers and branches, ostensibly until sales start moving in the right direction again. As of November, housing starts had fallen nearly 25 percent since the start of 2007.
The housing downturn is starting to reverberate in the overall economy. While some economists say there is no chance of a recession in the next couple of years and say only to plan for a slowdown, others are certain of it. Regardless, sales growth for most companies has recently been in the single digits – which many expected when 2007 began.
The Dreaded ‘R’ Word
Economic worries joined consolidation as a top concern for distributors this year. Economist Alan Beaulieu, a frequent speaker at distributor meetings, forecasts a recession to begin in 2009 based on the idea we are already in a slowdown due to the housing decline, high interest rates, baby boomers’ approaching retirement (resulting in government budget strain), high oil prices (and their impact on consumer spending) and demand for oil in India and China, inflation and pressure on wages, and a slowdown in business spending.
The weakening U.S. dollar has hit manufacturers and distributors that buy product overseas, but has also resulted in a surge in exports, boosting the bottom lines of many companies and supporting overall economic growth. Commodity prices are starting to fall, meaning many distributors will no longer be able to depend on commodity inflation to boost their bottom lines.
Distributors are shifting back to the mindset formed during the tough years of 2001-2002. But they should not be too quick to cut staff or avoid investments. According to many business planning experts, now is the time to consider opportunities your competitors may avoid because of the slowing, such as employee recruitment and small, strategic acquisitions.
That said, one building materials distributor, Suncoast Roofing Supply, attributed its recently filed Ch. 11 bankruptcy to an attempt to expand too quickly. “This rapid expansion during one of the worst housing market declines in decades has left the Debtor strapped for cash required for working capital,” the distributor said in its bankruptcy filing.
Big Year in M&A
Though Home Depot still was easily the biggest story this year, other major acquisitions weren’t far behind – and will probably have a bigger impact on the competitive landscape.
Home Depot sold its wholesale unit to a trio of private equity firms, but the unit still exists, and the standalone HD Supply does plan to continue its acquisitive path as a leaner, fiercer competitor.
The company is already divesting units it does not see as central to a strong national strategy. Pro-Build Holdings, Denver, CO, plans to buy HD Supply’s lumber and building materials assets, which had about $800 million in annual sales when acquired. Watsco plans to buy HD Supply’s HVAC operations, which according to some estimates total $200 million to $300 million in annual sales.
More than anything, the HD Supply deal was a signal of what was to come: a drop in median valuations.
HD Supply’s original purchase price – $10.3 billion – was a pleasant surprise in that industry-watchers thought we would continue to see acquirers pay high multiples at least in the near-term. But that number soon dropped nearly $2 billion to $8.5 billion when the banks financing the deal backed off.
Home Depot sold its wholesale unit to a trio of private equity firms, but the unit still exists, and the standalone HD Supply does plan to continue its acquisitive path as a leaner, fiercer competitor.
The company is already divesting units it does not see as central to a strong national strategy. Pro-Build Holdings, Denver, CO, plans to buy HD Supply’s lumber and building materials assets, which had about $800 million in annual sales when acquired. Watsco plans to buy HD Supply’s HVAC operations, which according to some estimates total $200 million to $300 million in annual sales.
More than anything, the HD Supply deal was a signal of what was to come: a drop in median valuations.
HD Supply’s original purchase price – $10.3 billion – was a pleasant surprise in that industry-watchers thought we would continue to see acquirers pay high multiples at least in the near-term. But that number soon dropped nearly $2 billion to $8.5 billion when the banks financing the deal backed off.
The so-called credit crunch was just rearing its head. Banks seemingly overnight became more reluctant to lend money, due to the difficulty of spreading the risk of their loans. Private equity was originally the driving force behind a spike in valuations. But with less money for Leveraged Buyouts (private equity firms’ acquisition vehicle of choice), valuations will fall from levels that in some cases were closer to 12X EBITDA.
But just as with housing prices, most in the industry believed that valuations would eventually normalize.
What’s the Big(gest) Deal?
The biggest acquisition announced this year (but not yet completed) is the agreed-upon purchase of Hagemeyer NV by rival electrical distributor Rexel for €3.1 billion (US$4.5 billion).
In a twist, Rexel will split Hagemeyer’s assets with another Paris-based rival, Sonepar. As a result, Sonepar’s U.S. operations will shift, as it takes on Hagemeyer industrial integrated supply assets here. Rexel will have more than 50 percent of its sales in Europe; before the deal, Rexel had more than 50 percent in the U.S.
The electrical world was among the most active in M&A this year. Consolidated Electrical Distributors purchased former Sonepar USA chief Richard Worthy’s US Electrical Services; as both have similar business models, the acquisition won’t change US Electrical Services’ model of acquiring small regional distributors and those distributors’ keeping their names.
In other sectors: DXP Enterprises Inc. bought Precision Industries in a highly complementary transaction in terms of end markets and product/service lines. And Industrial PVF distributors McJunkin Corp. and Red Man Pipe and Supply, enjoying strong growth from their core oil-and-gas customer base, are now one: McJunkin Red Man.
Building materials distributors Wolseley plc and Pro-Building Holdings and industrial gases distributors Airgas and Praxair, stayed busy as usual on the acquisition trail. Those companies have stuck with their strategies of buying local and small regional distributors to complement product lines and fill holes in key markets in the U.S. and overseas.
Still to come, Industrial Distribution Group, Atlanta, GA, is looking at “strategic alternatives,” which means it will probably announce sooner rather than later a buyer for the $550 million industrial distribution company.
The drug distribution business kept pace, with AmerisourceBergen Corporation buying Bellco Health, and Cardinal Health buying the distribution business of F. Dohmen Co.
For more on acquisitions this year, visit www.mdm.com.
In a twist, Rexel will split Hagemeyer’s assets with another Paris-based rival, Sonepar. As a result, Sonepar’s U.S. operations will shift, as it takes on Hagemeyer industrial integrated supply assets here. Rexel will have more than 50 percent of its sales in Europe; before the deal, Rexel had more than 50 percent in the U.S.
The electrical world was among the most active in M&A this year. Consolidated Electrical Distributors purchased former Sonepar USA chief Richard Worthy’s US Electrical Services; as both have similar business models, the acquisition won’t change US Electrical Services’ model of acquiring small regional distributors and those distributors’ keeping their names.
In other sectors: DXP Enterprises Inc. bought Precision Industries in a highly complementary transaction in terms of end markets and product/service lines. And Industrial PVF distributors McJunkin Corp. and Red Man Pipe and Supply, enjoying strong growth from their core oil-and-gas customer base, are now one: McJunkin Red Man.
Building materials distributors Wolseley plc and Pro-Building Holdings and industrial gases distributors Airgas and Praxair, stayed busy as usual on the acquisition trail. Those companies have stuck with their strategies of buying local and small regional distributors to complement product lines and fill holes in key markets in the U.S. and overseas.
Still to come, Industrial Distribution Group, Atlanta, GA, is looking at “strategic alternatives,” which means it will probably announce sooner rather than later a buyer for the $550 million industrial distribution company.
The drug distribution business kept pace, with AmerisourceBergen Corporation buying Bellco Health, and Cardinal Health buying the distribution business of F. Dohmen Co.
For more on acquisitions this year, visit www.mdm.com.
Private Equity Stays Put
Though strategic players definitely stepped it up in the second half of 2007, private equity stayed involved in the distribution space. In fact, despite the growing “credit crunch,” private equity firms still have a lot of cash to spend on both big and small buys.
ORS Nasco quickly changed hands from Brazos Equity Partners LLC to United Stationers Inc., which bought the master distributor to beef up its industrial offerings.
Foodservice distributor Ahold agreed to sell U.S. Foodservice ($19.2 billion in 2006 sales) to a pair of private equity firms for $7.1 billion.
Platinum Equity has been a big player in distribution, buying both Ryerson Inc., a metals distributor in Chicago, IL, and Strategic Distribution Inc., Bristol, PA.
The value of private equity investment came into question toward the end of the year when Hoboken Wood Flooring, Hoboken, NJ, closed its doors and filed for Ch. 7 bankruptcy. The distributor, majority-owned by Code Hennessy & Simmons, a distribution-seasoned private equity firm, was the largest independent wood flooring distributor in the U.S. The failure may facilitate an exodus of private equity firms that have only relatively recently jumped into the space.
Because Hoboken’s bankruptcy was eventually dismissed, the real reason behind the collapse is not yet known, but some attribute it to a culture clash between the original family owners and the new investors. The housing downturn may have played a part in exasperating an already down situation; and so might have the distributor’s push to expand nationally.
ORS Nasco quickly changed hands from Brazos Equity Partners LLC to United Stationers Inc., which bought the master distributor to beef up its industrial offerings.
Foodservice distributor Ahold agreed to sell U.S. Foodservice ($19.2 billion in 2006 sales) to a pair of private equity firms for $7.1 billion.
Platinum Equity has been a big player in distribution, buying both Ryerson Inc., a metals distributor in Chicago, IL, and Strategic Distribution Inc., Bristol, PA.
The value of private equity investment came into question toward the end of the year when Hoboken Wood Flooring, Hoboken, NJ, closed its doors and filed for Ch. 7 bankruptcy. The distributor, majority-owned by Code Hennessy & Simmons, a distribution-seasoned private equity firm, was the largest independent wood flooring distributor in the U.S. The failure may facilitate an exodus of private equity firms that have only relatively recently jumped into the space.
Because Hoboken’s bankruptcy was eventually dismissed, the real reason behind the collapse is not yet known, but some attribute it to a culture clash between the original family owners and the new investors. The housing downturn may have played a part in exasperating an already down situation; and so might have the distributor’s push to expand nationally.
Moving Forward
Market forces continue to grow more complex. Consolidation is shifting the competitive landscape as customers increasingly have more options to meet their needs. Distributors in some sectors are losing customers to the other side of the ocean; some found opportunity by following those customers to Europe or to Asia.
More distributors are seeing impacts from beyond North American borders, and global sourcing is growing in importance to cost-squeezed suppliers. As private label becomes more common among distributors, product liability has also stepped front and center in sourcing decisions.
What’s more, counterfeit products are making their way into North American and European markets, creating a safety issue for end-users and a brand-protection issue for manufacturers.
Larger distributors, like Chicago, IL-based Grainger, are still reaching into tangential product areas for growth so that they can provide a broader one-stop shopping experience for their customers. Grainger launched a plumbing specialty catalog this year with more than 12,000 new products. Grainger also bolstered its offering in material handling, fasteners and security products this year.
More distributors are looking at ways to improve profit margins, either through private-label products or by homing in on specialty product areas where they can stand out. Distributors small and large are also taking the concept of strategic pricing seriously as they look for ways to price the value they add and maintain profitability.
We are on the back-end of a boom and moving into a less-than-robust era, where distributors will be forced to more clearly define their value to stay relevant to customers that are increasingly seeking ways to get lean but at the same time rein in the best service they can.
More distributors are seeing impacts from beyond North American borders, and global sourcing is growing in importance to cost-squeezed suppliers. As private label becomes more common among distributors, product liability has also stepped front and center in sourcing decisions.
What’s more, counterfeit products are making their way into North American and European markets, creating a safety issue for end-users and a brand-protection issue for manufacturers.
Larger distributors, like Chicago, IL-based Grainger, are still reaching into tangential product areas for growth so that they can provide a broader one-stop shopping experience for their customers. Grainger launched a plumbing specialty catalog this year with more than 12,000 new products. Grainger also bolstered its offering in material handling, fasteners and security products this year.
More distributors are looking at ways to improve profit margins, either through private-label products or by homing in on specialty product areas where they can stand out. Distributors small and large are also taking the concept of strategic pricing seriously as they look for ways to price the value they add and maintain profitability.
We are on the back-end of a boom and moving into a less-than-robust era, where distributors will be forced to more clearly define their value to stay relevant to customers that are increasingly seeking ways to get lean but at the same time rein in the best service they can.
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